-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Fvokn2KAiHIF8bWlsHa7Vp2piJrMpU97x+VMc7jwIvF99SeX59uzntRrnWlZSGU9 mTd5QJTivGzYnP9Px9bD+A== 0000908834-00-000048.txt : 20000324 0000908834-00-000048.hdr.sgml : 20000324 ACCESSION NUMBER: 0000908834-00-000048 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000323 FILER: COMPANY DATA: COMPANY CONFORMED NAME: RIVER VALLEY BANCORP CENTRAL INDEX KEY: 0001015593 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTION, FEDERALLY CHARTERED [6035] IRS NUMBER: 351984567 STATE OF INCORPORATION: IN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-21765 FILM NUMBER: 576870 BUSINESS ADDRESS: STREET 1: 303 CLIFTY DR CITY: MADISON STATE: IN ZIP: 47250 BUSINESS PHONE: 8122734949 MAIL ADDRESS: STREET 1: 303 CLIFTY DR CITY: MADISON STATE: IN ZIP: 47250 10-K 1 FORM 10-K FOR RIVER VALLEY BANCORP FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) [X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 1999 or [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from _____________ to _______________ Commission File Number 0-21765 RIVER VALLEY BANCORP (Exact name of registrant as specified in its charter) INDIANA 35-1984567 (State or other Jurisdiction (I.R.S. Employer Identification of Incorporation or Organization) Number) 430 Clifty Drive P.O. Box 1590 Madison, Indiana 47250-0590 (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number including area code: (812) 273-4949 Securities Registered Pursuant to Section 12(b) of the Act: None Securities Registered Pursuant to Section 12(g) of the Act: Common Stock, without par value (Title of Class) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. YES X NO ____ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. N/A The aggregate market value of the issuer's voting stock held by non-affiliates, as of March 17, 2000 was $8,600,671.86. The number of shares of the Registrant's Common Stock, without par value, outstanding as of March 17, 2000, was 921,972 shares. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Annual Report to Shareholders for the year ended December 31, 1999, are incorporated into Part II. Portions of the Proxy Statement for the 2000 Annual Meeting of Shareholders are incorporated in Part I and Part III. Exhibit Index on Page E-1 Page 1 of 31 Pages RIVER VALLEY BANCORP Form 10-K INDEX Page Forward Looking Statement..................................................... 3 PART I Item 1. Business....................................................... 3 Item 2. Properties.....................................................26 Item 3. Legal Proceedings..............................................27 Item 4. Submission of Matters to a Vote of Security Holders............27 Item 4.5. Executive Officers of the Registrant...........................27 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters........................................28 Item 6. Selected Consolidated Financial Data...........................28 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations........................28 Item 7A. Quantitative and Qualitative Analysis of Financial Condition and Results of Operation...................................28 Item 8. Financial Statements and Supplementary Data....................28 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure........................28 PART III Item 10. Directors and Executive Officers of Registrant.................29 Item 11. Executive Compensation.........................................29 Item 12. Security Ownership of Certain Beneficial Owners and Management......................................29 Item 13. Certain Relationships and Related Transactions.................29 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K....................................29 SIGNATURES ...........................................................30 FORWARD LOOKING STATEMENT This Annual Report on Form 10-K ("Form 10-K") contains statements which constitute forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements appear in a number of places in this Form 10-K and include statements regarding the intent, belief, outlook, estimates or expectations of the Holding Company (as defined below), its directors, or its officers primarily with respect to future events and the future financial performance of the Holding Company. Readers of this Form 10-K are cautioned that any such forward looking statements are not guarantees of future events or performance and involve risks and uncertainties, and that actual results may differ materially from those in the forward looking statements as a result of various factors. The accompanying information contained in this Form 10-K identifies important factors that could cause such differences. These factors include but are not limited to changes in interest rates; loss of deposits and loan demand to other savings and financial institutions; substantial changes in financial markets; changes in real estate values and the real estate market; regulatory changes; or unanticipated results in pending legal proceedings. Item 1. Business General River Valley Bancorp, an Indiana corporation (the "Holding Company"), was organized in May, 1996. On December 20, 1996, it acquired the common stock of Madison First Federal Savings and Loan Association ("First Federal") upon the conversion of First Federal from a federal mutual savings and loan association to a federal stock savings and loan association (the "Conversion"), and acquired 120,434 shares of common stock, $8.00 par value per share (the "Citizens Shares"), of Citizens National Bank of Madison ("Citizens"), constituting 95.6% of the issued and outstanding shares of Citizens' common stock (the "Acquisition"). On November 22, 1997, Citizens merged with and into First Federal (the "Merger") pursuant to an Agreement and Plan of Reorganization entered into among the Holding Company, First Federal and Citizens dated September 26, 1997 (the "Agreement"). Pursuant to the Agreement, each outstanding share of Citizens common stock held by shareholders other than the Holding Company was converted into the right to receive $30 cash, payable by the Holding Company, and shares of Citizens held by the Holding Company and its subsidiaries were cancelled. Also, pursuant to the Agreement, First Federal changed its corporate title to River Valley Financial Bank (the "Bank"). Following the effective time of the Merger, the Holding Company remained as the sole shareholder of the Bank, and Citizens' status as a national banking association terminated. For ease of reference, First Federal will be referred to as the "Bank" hereinafter both with respect to historical information concerning events and results of operations prior to the Merger and with respect to information relating to events occurring after the Merger. The Conversion of the Bank was accounted for in a manner similar to a pooling of interests, and the Acquisition of Citizens was accounted for as a purchase transaction. Under purchase accounting, the acquired assets and liabilities of Citizens were recorded at fair value as of December 20, 1996. Because the assets and liabilities of the Bank were recorded at fair value as of the date of the Acquisition, the financial data prior to December 20, 1996 provided herein does not include information derived from the financial statements of Citizens. Rather, such financial data provided herein includes only information derived from the financial statements of the Bank. From and after December 20, 1996, the operating results of Citizens and the Bank are consolidated with those of the Holding Company. The Merger was accounted for in a manner similar to a pooling of interests. The Bank was organized as a federally chartered savings and loan association in 1875. The Bank is the oldest independent financial institution headquartered in Jefferson County, Indiana. Citizens was organized as a national bank in 1981 and, until the Merger, conducted its business from four full-service offices, all located in Jefferson County, Indiana. Following the Merger, these offices became branch offices of the Bank. Prior to the Conversion, the Bank conducted its business from three full-service offices and one stand-alone drive-through branch, all located in Jefferson County, Indiana. As a result of the Acquisition, the Holding Company became subject to regulation as a bank holding company by the Board of Governors of the Federal Reserve System (the "FRB"). As a condition to the Holding Company obtaining the requisite approval from the FRB for the Acquisition, the Holding Company committed to cause the Bank to (i) enter into a definitive agreement to sell the Bank's Hanover, Indiana branch prior to consummation of the Acquisition and (ii) complete the sale of the Hanover, Indiana branch, including the physical facilities and deposits originated at that branch, within 180 days of consummation of the Acquisition. On February 28, 1997, the Bank sold its Hanover, Indiana branch to People's Trust Company based in Brookville, Indiana ("People's Trust"), pursuant to that commitment. Deposits totaling $6.8 million were assumed by People's Trust, and the Bank recorded an after tax gain of $125,000 on the transaction. As a result of the Merger and the resulting termination of Citizens' status as a national banking association, the Holding Company is no longer subject to regulation by the FRB as a bank holding company and is instead regulated by the Office of Thrift Supervision (the "OTS") as a savings and loan holding company. The Bank historically has concentrated its lending activities on the origination of loans secured by first mortgage liens for the purchase, construction, or refinancing of one- to four- family residential real property. One- to four-family residential mortgage loans continue to be the major focus of the Bank's loan origination activities, representing 58.6% of the Bank's total loan portfolio at December 31, 1999. The Bank had not identified any loans held for sale at December 31, 1999. The Bank also offers multi-family mortgage loans, non-residential real estate loans, land loans, construction loans, nonmortgage commercial loans and consumer loans. Its principal market area is Jefferson County, Indiana and adjoining counties. Loan Portfolio Data. The following table sets forth the composition of the Bank's loan portfolio, including loans held for sale, as of December 31, 1999, 1998 and 1997 by loan type as of the dates indicated, including a reconciliation of gross loans receivable after consideration of the allowance for loan losses, deferred loan origination costs and loans in process.
At December 31, -------------------------------------------------------------- 1999 1998 1997 ------------------ ----------------- ----------------- Percent Percent Percent Amount of Total Amount of Total Amount of Total ------ -------- ------ -------- ------ -------- TYPE OF LOAN (Dollars in thousands) Residential real estate: One-to four-family..................... $69,588 58.6% $65,907 57.4% $72,072 63.7% Multi-family........................... 2,918 2.5 1,775 1.6 2,781 2.5 Construction........................... 4,163 3.5 8,126 7.1 3,652 3.2 Nonresidential real estate................ 12,758 10.7 7,604 6.6 8,379 7.4 Land loans................................ 10,079 8.5 6,300 5.5 6,324 5.6 Consumer loans: Automobile loans....................... 6,922 5.8 6,828 5.9 8,028 7.1 Loans secured by deposits.............. 548 .5 723 .6 1,041 .9 Home improvement loans................. 34 --- --- --- 205 .2 Other.................................. 2,040 1.7 5,089 4.4 5,707 5.1 Commercial loans.......................... 9,780 8.2 12,461 10.9 4,871 4.3 -------- ---- -------- ---- -------- ---- Gross loans receivable.................... 118,830 100.0 114,813 100.0 113,060 100.0 Add/(Deduct): Deferred loan origination costs........ 245 .2 200 .2 202 .2 Undisbursed portions of loans in process.................. (2,422) (2.0) (1,151) (1.0) (99) (.1) Allowance for loan losses.............. (1,522) (1.3) (1,477) (1.3) (1,276) (1.1) -------- ---- -------- ---- -------- ---- Net loans receivable...................... $115,131 96.9% $112,385 97.9% $111,887 99.0% ======== ==== ======== ==== ======== ====
The following table sets forth certain information at December 31, 1999, regarding the dollar amount of loans maturing in the Bank's loan portfolio based on the contractual terms to maturity. Demand loans, loans having no stated schedule of repayments and no stated maturity and overdrafts are reported as due in one year or less. This schedule does not reflect the effects of possible prepayments or enforcement of due-on-sale clauses. Management expects prepayments will cause actual maturities to be shorter.
Balance Due During Years Ended December 31, Outstanding at 2003 2005 2010 2015 December 31, to to to and 1999 2000 2001 2002 2004 2009 2014 following ------------- ------ ------ ------- ------- ------ ------- --------- (In thousands) Residential real estate loans: One-to four-family................. $69,588 $1,084 $ 225 $ 617 $1,387 $7,781 $20,992 $37,502 Multi-family....................... 2,918 --- --- --- 157 76 502 2,183 Construction....................... 4,163 4,050 --- --- --- 94 19 --- Nonresidential Real estate loans.................. 12,758 1,133 433 87 404 2,987 2,982 4,732 Land loans ......................... 10,079 3,037 592 515 583 802 1,185 3,365 Consumer loans: Loans secured by deposits.......... 548 245 15 43 147 43 55 --- Other loans........................ 8,996 1,040 1,463 1,435 2,730 1,117 89 1,122 Commercial loans...................... 9,780 5,467 665 471 1,959 662 318 238 -------- ------- ------ ------ ------ ------- ------- ------- Total............................ $118,830 $16,056 $3,393 $3,168 $7,367 $13,562 $26,142 $49,142 ======== ======= ====== ====== ====== ======= ======= =======
The following table sets forth, as of December 31, 1999, the dollar amount of all loans due after one year that have fixed interest rates and floating or adjustable interest rates. Due After December 31, 2000 ----------------------------------------- Fixed Rates Variable Rates Total ----------- -------------- ----- (In thousands) Residential real estate loans: One-to four-family.............. $14,871 $53,633 $68,504 Multi-family.................... 151 2,767 2,918 Construction.................... --- 113 113 Non-residential Real estate loans............... 636 10,989 11,625 Land loans ...................... 1,309 5,733 7,042 Consumer loans: Loans secured by deposits....... 276 27 303 Other loans..................... 6,323 1,633 7,956 Commercial loans................... 1,916 2,397 4,313 ------- ------- -------- Total......................... $25,482 $77,292 $102,774 ======= ======= ======== Residential Loans. Residential loans consist primarily of one- to four-family loans. Approximately $69.6 million, or 58.6% of the Bank's portfolio of loans, at December 31, 1999, consisted of one- to four-family residential loans, of which approximately 78.3% had adjustable rates. The Bank currently offers adjustable-rate one- to four-family residential mortgage loans ("ARMs") which adjust annually and are indexed to the one-year U.S. Treasury securities yields adjusted to a constant maturity, although until late 1995, the Bank's ARMs were indexed to the 11th District Cost of Funds. Some of the Bank's residential ARMs are originated at a discount or "teaser" rate which is generally 150 to 175 basis points below the "fully indexed" rate. These ARMs then adjust annually to maintain a margin above the applicable index, subject to maximum rate adjustments discussed below. The Bank's ARMs have a current margin above such index of 2.5% for owner-occupied properties and 3.0% for non-owner-occupied properties. A substantial portion of the ARMs in the Bank's portfolio at December 31, 1999 provide for maximum rate adjustments per year and over the life of the loan of 1% and 4%, respectively, although the Bank also originates residential ARMs which provide for maximum rate adjustments per year and over the life of the loan of 1.5% and 6%, respectively. The Bank's ARMs generally provide for interest rate minimums of 1% below the origination rate. The Bank's residential ARMs are amortized for terms up to 30 years. Adjustable-rate loans decrease the risk associated with changes in interest rates but involve other risks, primarily because as interest rates rise, the payments by the borrowers may rise to the extent permitted by the terms of the loan, thereby increasing the potential for default. Also, adjustable-rate loans have features which restrict changes in interest rates on a short-term basis and over the life of the loan. At the same time, the market value of the underlying property may be adversely affected by higher interest rates. The Bank currently offers fixed-rate one- to four-family residential mortgage loans which provide for the payment of principal and interest over periods of 10 to 30 years. Prior to the Merger, the Bank retained all of its fixed-rate residential mortgage loans in its portfolio; however, after the effective date of the Merger, the Bank began underwriting its fixed-rate residential mortgage loans for potential sale to the Federal Home Loan Mortgage Corporation (the "FHLMC") on a servicing-retained basis. At December 31, 1999, approximately 21.7% of the Bank's one- to four-family residential mortgage loans had fixed rates. Before the Merger, Citizens offered fixed-rate one- to four-family residential mortgage loans in accordance with the guidelines established by the FHLMC to facilitate the sale of such loans to the FHLMC in the secondary market. These loans amortized on a monthly basis with principal and interest due each month and were written with terms of 15, 20 and 30 years. Citizens retained the servicing on all loans sold to the FHLMC. At December 31, 1999, the Bank had approximately $40.2 million of fixed-rate residential mortgage loans which were sold to the FHLMC and for which the Bank provides servicing. The Bank generally does not originate one- to four-family residential mortgage loans if the ratio of the loan amount to the lesser of the current cost or appraised value of the property (i.e. the "Loan-to-Value Ratio") exceeds 95% and generally does not originate one- to four-family residential ARMs if the Loan-to-Value Ratio exceeds 80%. The Bank generally requires private mortgage insurance on all conventional one- to four-family residential real estate mortgage loans with Loan-to-Value Ratios in excess of 80%. The cost of such insurance is factored into the APY on such loans, and is not automatically eliminated when the principal balance is reduced over the term of the loan. Substantially all of the one- to four-family residential mortgage loans that the Bank originates include "due-on-sale" clauses, which give the Bank the right to declare a loan immediately due and payable in the event that, among other things, the borrower sells or otherwise disposes of the real property subject to the mortgage and the loan is not repaid. However, the Bank does permit assumptions of existing residential mortgage loans on a case-by-case basis. At December 31, 1999, the Bank had outstanding approximately $3.2 million of home equity loans, with unused lines of credit totalling approximately $2.7 million. No home equity loans were included in non-performing assets on that date. The Bank's home equity lines of credit are adjustable-rate lines of credit tied to the prime rate and are amortized based on a 10- to 20-year maturity. The Bank generally allows a maximum 90% Loan-to-Value Ratio for its home equity loans (taking into account any other mortgages on the property). Payments on such home equity loans equal 1.5% of the outstanding principal balance per month. The Bank also offers indemnification mortgage loans ("ID Mortgage Loans"), which are typically written as fixed-rate second mortgage loans. The Bank's ID Mortgage Loans are written for terms of 5 years and generally have maximum Loan-to-Value Ratios of 80%. The Bank also offers standard second mortgage loans, which are adjustable-rate loans tied to the U.S. Treasury securities yields adjusted to a constant maturity with a current margin above such index of 3.0%. The Bank's second mortgage loans have maximum rate adjustments per year and over the terms of the loans equal to 1.0% and 4.0%, respectively. The Bank's second mortgage loans have terms of 10 to 30 years. At December 31, 1999, one- to four-family residential mortgage loans amounting to $726,000, or .61% of total loans, were included in the Bank's non-performing assets. Construction Loans. The Bank offers construction loans with respect to residential and nonresidential real estate and, in certain cases, to builders or developers constructing such properties on a speculative basis (i.e., before the builder/developer obtains a commitment from a buyer). Generally, construction loans are written as 12-month fixed-rate loans with interest calculated on the amount disbursed under the loan and payable on a semi-annual or monthly basis. The Bank generally requires an 80% Loan-to-Value Ratio for its construction loans, although the Bank may permit an 85% Loan-to-Value Ratio for one- to four-family residential construction loans. Inspections are generally made prior to any disbursement under a construction loan, and the Bank does not charge commitment fees for its construction loans. At December 31, 1999, $4.2 million, or 3.5% of the Bank's total loan portfolio, consisted of construction loans. The largest construction loan at December 31, 1999, totalled $300,000. No construction loans were included in non-performing assets on that date. While providing the Bank with a comparable, and in some cases higher, yield than a conventional mortgage loan, construction loans involve a higher level of risk. For example, if a project is not completed and the borrower defaults, the Bank may have to hire another contractor to complete the project at a higher cost. Also, a project may be completed, but may not be saleable, resulting in the borrower defaulting and the Bank taking title to the project. Nonresidential Real Estate Loans. At December 31, 1999, $12.8 million, or 10.7% of the Bank's portfolio, consisted of nonresidential real estate loans. Nonresidential real estate loans are primarily secured by real estate such as churches, farms and small business properties. The Bank originates nonresidential real estate loans as one-year adjustable-rate loans indexed to the one-year U.S. Treasury securities yields adjusted to a constant maturity, written for maximum terms of 30 years. The Bank's adjustable-rate nonresidential real estate loans have maximum adjustments per year and over the life of the loan of 1% and 4%, respectively, and interest rate minimums of 1% below the origination rate. The Bank generally requires a Loan-to-Value Ratio of up to 80%, depending on the nature of the real estate collateral. The Bank underwrites its nonresidential real estate loans on a case-by-case basis and, in addition to its normal underwriting criteria, evaluates the borrower's ability to service the debt from the net operating income of the property. The Bank's largest nonresidential real estate loan as of December 31, 1999 was $1.6 million and was secured by three commercial buildings in (or close in proximity to) Madison, Indiana. No nonresidential real estate loans were included in non-performing assets at December 31, 1999. Loans secured by nonresidential real estate generally are larger than one- to four-family residential loans and involve a greater degree of risk. Nonresidential real estate loans often involve large loan balances to single borrowers or groups of related borrowers. Payments on these loans depend to a large degree on results of operations and management of the properties and may be affected to a greater extent by adverse conditions in the real estate market or the economy in general. Accordingly, the nature of the loans makes them more difficult for management to monitor and evaluate. Multi-family Loans. At December 31, 1999, approximately $2.9 million, or 2.5% of the Bank's total loan portfolio, consisted of mortgage loans secured by multi-family dwellings (those consisting of more than four units). The Bank writes multi-family loans on terms and conditions similar to its nonresidential real estate loans. The largest multi-family loan in the Bank's portfolio as of December 31, 1999 was $1.5 million and was secured by a 46 unit apartment complex in Hanover, Indiana. No multi-family loans were included in non-performing assets on that date. Multi-family loans, like nonresidential real estate loans, involve a greater risk than do residential loans. See "Nonresidential Real Estate Loans" above. Also, the loans-to-one borrower limitations restrict the ability of the Bank to make loans to developers of apartment complexes and other multi-family units. Land Loans. At December 31, 1999, approximately $10.1 million, or 8.5% of the Bank's total loan portfolio, consisted of mortgage loans secured by undeveloped real estate. The Bank's land loans are generally written on terms and conditions similar to its nonresidential real estate loans. Some of the Bank's land loans are land development loans; i.e., the proceeds of the loans are used for improvements to the real estate such as streets and sewers. At December 31, 1999, the Bank's largest land loan totalled $600,000. Land loans totalling $36,000, or .03% of the Bank's total loan portfolio, were included in non-performing assets as of December 31, 1999. Such loans are more risky than conventional loans since land development borrowers who are over budget may divert the loan funds to cover cost-overruns rather than direct them toward the purpose for which such loans were made. In addition, those loans are more difficult to monitor than conventional mortgage loans. As such, a defaulting borrower could cause the Bank to take title to partially improved land that is unmarketable without further capital investment. Commercial Loans. At December 31, 1999, $9.8 million, or 8.2% of the Bank's total loan portfolio, consisted of nonmortgage commercial loans. The Bank's commercial loans are written on either a fixed-rate or an adjustable-rate basis with terms that vary depending on the type of security, if any. At December 31, 1999, approximately 93.6% of the Bank's commercial loans were secured by collateral, such as equipment, inventory and crops. The Bank's adjustable-rate commercial loans are generally indexed to the prime rate with varying margins and terms depending on the type of collateral securing the loans and the credit quality of the borrowers. At December 31, 1999, the largest commercial loan was $1.2 million. As of the same date, commercial loans totalling $23,000 were included in non-performing assets. Commercial loans tend to bear somewhat greater risk than residential mortgage loans, depending on the ability of the underlying enterprise to repay the loan. Further, they are frequently larger in amount than the Bank's average residential mortgage loans. Consumer Loans. The Bank's consumer loans, consisting primarily of auto loans, home improvement loans, unsecured installment loans, loans secured by deposits and mobile home loans aggregated approximately $9.5 million at December 31, 1999, or 8.0% of the Bank's total loan portfolio. The Bank consistently originates consumer loans to meet the needs of its customers and to assist in meeting its asset/liability management goals. All of the Bank's consumer loans, except loans secured by deposits, are fixed-rate loans with terms that vary from six months (for unsecured installment loans) to 60 months (for home improvement loans and loans secured by new automobiles). At December 31, 1999, 88.8% of the Bank's consumer loans were secured by collateral. The Bank's loans secured by deposits are made up to 90% of the current account balance and accrue at a rate of 2% over the underlying passbook or certificate of deposit rate. The Bank offers both direct and indirect automobile loans. Under the Bank's indirect automobile program, participating automobile dealers receive loan applications from prospective purchasers of automobiles at the point of sale and deliver them to the Bank for processing. The dealer receives a portion of the interest payable on approved loans. Consumer loans may entail greater risk than residential mortgage loans, particularly in the case of consumer loans which are unsecured or are secured by rapidly depreciable assets, such as automobiles. Further, any repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment of the outstanding loan balance. In addition, consumer loan collections depend upon the borrower's continuing financial stability, and thus are more likely to be affected by adverse personal circumstances. Furthermore, the application of various federal and state laws, including bankruptcy and insolvency laws, may limit the amount which can be recovered on such loans. At December 31, 1999, consumer loans amounting to $72,000 were included in non-performing assets. Origination, Purchase and Sale of Loans. The Bank historically has originated its ARMs pursuant to its own underwriting standards which did not conform with the standard criteria of the FHLMC or Federal National Mortgage Association ("FNMA"). The Bank's ARMs varied from secondary market criteria because, among other things, the Bank did not require current property surveys in most cases and did not permit the conversion of those loans to fixed rate loans in the first three years of its term. If the Bank desired to sell its non-conforming ARMs, it may experience difficulty in selling such loans quickly in the secondary market. The Bank began underwriting fixed-rate residential mortgage loans for potential sale to the FHLMC on a servicing-retained basis after the Merger. Prior to the Merger, Citizens also originated loans for sale to the FHLMC and retained servicing rights for a fee of one-fourth of 1% of the principal balance of all loans serviced. Loans originated for sale to the FHLMC in the secondary market are originated in accordance with the guidelines established by the FHLMC and are sold promptly after they are originated. The Bank receives a servicing fee of one-fourth of 1% of the principal balance of all loans serviced. At December 31, 1999, the Bank serviced $40.2 million in loans sold to the FHLMC. The Bank confines its loan origination activities primarily to Jefferson County and surrounding counties. At December 31, 1999, the Bank held loans totalling approximately $7.1 million that were secured by property located outside of Indiana. The Bank's loan originations are generated from referrals from existing customers, real estate brokers and newspaper and periodical advertising. Loan applications are taken at any of the Bank's five full-service offices. The Bank's loan approval processes are intended to assess the borrower's ability to repay the loan, the viability of the loan and the adequacy of the value of the property that will secure the loan. To assess the borrower's ability to repay, the Bank studies the employment and credit history and information on the historical and projected income and expenses of its mortgagors. Under the Bank's lending policy, a loan officer may approve mortgage loans up to $75,000, a Senior Loan Officer may approve mortgage loans up to $150,000 and the President may approve mortgage loans up to $220,000. All other mortgage loans must be approved by at least four members of the Bank's Board of Directors. The lending policy further provides that loans secured by readily marketable collateral, such as stock, bonds and certificates of deposit may be approved by a Loan Officer for up to $75,000, by a Senior Loan Officer for up to $150,000 and by the President up to $300,000. Loans secured by other non-real estate collateral may be approved by a Loan Officer for up to $25,000, by a Senior Loan Officer up to $75,000 and by the President up to $150,000. Finally, the lending policy provides that unsecured loans may be approved by a Loan Officer or senior loan officer up to $10,000 or by the President up to $25,000. All other unsecured loans or loans secured by non-real estate collateral must be approved by at least four members of the Bank's Board of Directors. The Bank generally requires appraisals on all real property securing its loans and requires an attorney's opinion or title insurance and a valid lien on the mortgaged real estate. Appraisals for all real property securing mortgage loans are performed by independent appraisers who are state-licensed. The Bank requires fire and extended coverage insurance in amounts at least equal to the principal amount of the loan and also requires flood insurance to protect the property securing its interest if the property is in a flood plain. The Bank also generally requires private mortgage insurance for all residential mortgage loans with Loan-to-Value Ratios of greater than 80%. The Bank does not require escrow accounts for insurance premiums or taxes. The Bank's underwriting standards for consumer and commercial loans are intended to protect against some of the risks inherent in making such loans. Borrower character, paying habits and financial strengths are important considerations. The Bank occasionally purchases participations in commercial loans, nonresidential real estate and multi-family loans from other financial institutions. At December 31, 1999, the Bank held in its loan portfolio participations in these types of loans aggregating approximately $25,000 that it had purchased, all of which were serviced by others. The Bank generally does not sell participations in any loans that it originates. The following table shows loan origination and repayment activity for the Bank during the periods indicated:
Year Ended December 31, ------------------------------------- 1999 1998 1997 ---- ---- ---- (In thousands) Loans Originated: Residential real estate loans (1).......... $28,816 $37,537 $28,123 Multi-family loans......................... 2,092 326 --- Construction loans......................... 4,838 5,108 5,740 Non-residential real estate loans.......... 3,995 447 3,516 Land loans................................. 4,554 2,909 3,473 Consumer loans............................. 5,945 6,423 8,276 Commercial loans........................... 6,625 16,771 4,489 ------- ------- -------- Total loans originated................. 56,865 69,521 53,617 Reductions: Sales...................................... 14,253 17,025 6,930 Principal loan repayments.................. 39,640 51,624 43,220 Transfers from loans to real estate owned.. --- --- 81 ------- ------- -------- Total reductions....................... 53,893 68,649 50,231 Decrease in other items (2)................ (226) (374) (377) ------- ------- -------- Net increase .............................. $ 2,746 $ 498 $ 3,009 ======= ======= ======== - ----------
(1) Includes loans originated for sale in the secondary market. (2) Other items consist of amortization of deferred loan origination costs, the provision for losses on loans and a charge to the allowance for loan losses. Origination and Other Fees. The Bank realizes income from loan origination fees, loan servicing fees, late charges, checking account service charges and fees for other miscellaneous services. Late charges are generally assessed if payment is not received within a specified number of days after it is due. The grace period depends on the individual loan documents. Non-Performing and Problem Assets Mortgage loans are reviewed by the Bank on a regular basis and are placed on a non-accrual status when management determines that the collectibility of the interest is less than probable or collection of any amount of principal is in doubt. Generally, when loans are placed on non-accrual status, unpaid accrued interest is written off, and further income is recognized only to the extent received. The Bank delivers delinquency notices with respect to all mortgage loans contractually past due 5 to 10 days. When loans are 30 days in default, personal contact is made with the borrower to establish an acceptable repayment schedule. Management is authorized to commence foreclosure proceedings for any loan upon making a determination that it is prudent to do so. Commercial and consumer loans are treated similarly. Interest income on consumer, commercial and other nonmortgage loans is accrued over the term of the loan except when serious doubt exists as to the collectibility of a loan, in which case accrual of interest is discontinued and the loan is written-off, or written down to the fair value of the collateral securing the loan. It is the Bank's policy to recognize losses on these loans as soon as they become apparent. Non-performing Assets. At December 31, 1999, $857,000, or .62% of consolidated total assets, were non-performing loans compared to $1.9 million, or 1.5% of consolidated total assets, at December 31, 1998. At December 31, 1999, residential loans and consumer loans accounted for $726,000 and $72,000, respectively, of non-performing assets. The Bank had no REO at December 31, 1999. The table below sets forth the amounts and categories of the Bank's non-performing assets (non-performing loans, foreclosed real estate and troubled debt restructurings) for the last three years. It is the policy of the Bank that all earned but uncollected interest on all loans be reviewed monthly to determine if any portion thereof should be classified as uncollectible for any loan past due in excess of 90 days.
At December 31, 1999 1998 1997 --------------------------------------- (Dollars in thousands) Non-performing assets: Non-performing loans......................... $857 $1,947 $ 718 Troubled debt restructurings ................ 835 937 411 ------ ------ ------ Total non-performing loans and troubled debt restructurings...................... 1,692 2,884 1,129 Foreclosed real estate....................... --- 82 82 ------ ------ ------ Total non-performing assets................ $1,692 $2,966 $1,211 ====== ====== ====== Total non-performing loans and troubled debt restructurings to total loans................ 1.42% 2.51% 1.00% ====== ====== ====== Total non-performing assets to total assets..... 1.22% 2.14% .88% ====== ====== ======
At December 31, 1999, the Bank held loans delinquent from 30 to 89 days totalling $334,000. Other than in connection with these loans and other delinquent loans disclosed in this section, management was not aware of any other borrowers who were experiencing financial difficulties. In addition, there were no other assets that would need to be disclosed as non-performing assets. Delinquent Loans. The following table sets forth certain information at December 31, 1999, 1998 and 1997, relating to delinquencies in the Bank's portfolio. Delinquent loans that are 90 days or more past due are considered non-performing assets.
At December 31, 1999 At December 31, 1998 At December 31, 1997 ------------------------------------- ------------------------------------ ------------------------------------ 30-89 Days 90 Days or More 30-89 Days 90 Days or More 30-89 Days 90 Days or More ------------------ ----------------- ------------------ ----------------- ----------------- ----------------- Principal Principal Principal Principal Principal Principal Number Balance Number Balance Number Balance Number Balance Number Balance Number Balance of Loans of Loans of Loans of Loans of Loans of Loans of Loans of Loans of Loans of Loans of Loans of Loans -------- --------- -------- -------- -------- -------- -------- --------- -------- --------- -------- -------- (Dollars in thousands) Residential real estate loans...... 5 $186 15 $726 69 $2,194 26 $931 16 $673 12 $431 Multi-family loans... --- --- --- --- --- --- --- --- --- --- --- --- Construction loans... --- --- --- --- --- --- 1 23 --- --- --- --- Land loans........... --- --- 1 36 1 11 3 203 --- --- 2 107 Non-residential real estate loans. --- --- --- --- --- --- 4 325 --- --- --- --- Consumer loans....... 32 133 13 72 86 560 56 465 24 160 22 152 Commercial loans..... 2 15 2 23 10 477 --- --- 2 113 1 28 -- ---- -- ---- --- ------ -- ------ -- ---- -- ---- Total............. 39 $334 31 $857 166 $3,242 90 $1,947 42 $946 37 $718 == ==== == ==== === ====== == ====== == ==== == ==== Delinquent loans to total loans....... 1.00% 4.52% 1.47% ==== ==== ====
Classified assets. Federal regulations and the Bank's Asset Classification Policy provide for the classification of loans and other assets such as debt and equity securities to be of lesser quality as "substandard," "doubtful," or "loss" assets. An asset is considered "substandard" if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. "Substandard" assets include those characterized by the "distinct possibility" that the Bank will sustain "some loss" if the deficiencies are not corrected. Assets classified as "doubtful" have all of the weaknesses inherent in those classified "substandard," with the added characteristic that the weaknesses present make "collection or liquidation in full," on the basis of currently existing facts, conditions, and values, "highly questionable and improbable." Assets classified as "loss" are those considered "uncollectible" and of such little value that their continuance as assets without the establishment of a specific loss reserve is not warranted. An insured institution is required to establish general allowances for loan losses in an amount deemed prudent by management for loans classified substandard or doubtful, as well as for other problem loans. General allowances represent loss allowances which have been established to recognize the inherent risk associated with lending activities, but which, unlike specific allowances, have not been allocated to particular problem assets. When an insured institution classifies problem assets as "loss," it is required either to establish a specific allowance for losses equal to 100% of the amount of the asset so classified or to charge off such amount. An institution's determination as to the classification of its assets and the amount of its valuation allowances is subject to review by the OTS, which can order the establishment of additional general or specific loss allowances. At December 31, 1999, the aggregate amount of the Bank's classified assets and general and specific loss allowances were as follows: At December 31, 1999 -------------------- (In thousands) Substandard assets................................. $1,912 Doubtful assets.................................... --- Loss assets........................................ 113 ------ Total classified assets........................ $2,025 ====== General loss allowances............................ $1,409 Specific loss allowances........................... 113 ------ Total allowances............................... $1,522 ====== The Bank regularly reviews its loan portfolio to determine whether any loans require classification in accordance with applicable regulations. Not all of the Bank's classified assets constitute non-performing assets. Allowance for Loan Losses The allowance for loan losses is maintained through the provision for loan losses, which is charged to earnings. The provision for loan losses is determined in conjunction with management's review and evaluation of current economic conditions (including those of the Bank's lending area), changes in the character and size of the loan portfolio, loan delinquencies (current status as well as past and anticipated trends) and adequacy of collateral securing loan delinquencies, historical and estimated net charge-offs and other pertinent information derived from a review of the loan portfolio. In management's opinion, the Bank's allowance for loan losses is adequate to absorb probable losses from loans at December 31, 1999. However, there can be no assurance that regulators, when reviewing the Bank's loan portfolio in the future, will not require increases in its allowances for loan losses or that changes in economic conditions will not adversely affect the Bank's loan portfolio. Summary of Loan Loss Experience. The following table analyzes changes in the allowance during the five years ended December 31, 1999.
Year Ended December 31, ---------------------------------------------------------- 1999 1998 1997 1996 1995 ------ ------ ------ ------ ---- (Dollars in thousands) Balance at beginning of period................... $1,477 $1,276 $1,190 $ 407 $252 Charge-offs: Single-family residential................... (17) --- --- --- --- Consumer.................................... (86) (140) (254) (3) --- Commercial.................................. (20) (83) (15) --- --- ------ ------ ------ ------ ---- Total charge-offs......................... (123) (223) (269) (3) --- Recoveries....................................... 28 149 51 --- 5 ------ ------ ------ ------ ---- Net (charge-offs) recoveries.................. (95) (74) (218) (3) 5 Provision for losses on loans.................... 140 275 304 22 150 Increase due to Acquisition...................... --- --- --- 764 --- ------ ------ ------ ------ ---- Balance at end of period...................... $1,522 $1,477 $1,276 $1,190 $407 ====== ====== ====== ====== ==== Allowance for loan losses as a percent of total loans outstanding before net items...... 1.28% 1.29% 1.13% 1.07% 0.70% ====== ====== ====== ====== ==== Ratio of net (charge-offs) recoveries to average loans outstanding before net items............ (0.08)% (0.06)% (0.20)% (0.01)% 0.01% ====== ====== ====== ====== ====
Allocation of Allowance for Loan Losses. The following table presents an analysis of the allocation of the Bank's allowance for loan losses at the dates indicated.
At December 31, ------------------------------------------------------------------------- 1999 1998 1997 --------------------- -------------------- -------------------- Percent Percent Percent of loans of loans of loans in each in each in each category category category to total to total to total Amount loans Amount loans Amount loans ------ ----- ------ ----- ------ ----- (Dollars in thousands) Balance at end of period applicable to: Residential real estate............ $ 4 64.6% $ 11 66.1% $ 11 69.4% Nonresidential real estate......... --- 19.2 --- 12.1 --- 13.0 Consumer loans..................... 109 8.0 111 10.9 12 13.3 Commercial loans................... --- 8.2 --- 10.9 --- 4.3 Unallocated........................ 1,409 --- 1,355 --- 1,253 --- ------ ----- ------ ----- ------ ----- Total............................ $1,522 100.0% $1,477 100.0% $1,276 100.0% ====== ===== ====== ===== ====== =====
Investments and Mortgage-Backed Securities Investments. The Bank's investment portfolio consists of U.S. government and agency obligations, commercial paper, corporate bonds, municipal securities and Federal Home Loan Bank ("FHLB") stock. At December 31, 1999, approximately $6.2 million, or 4.5%, of the consolidated total assets consisted of such investments. The following table sets forth the amortized cost and the market value of the Bank's investment portfolio at the dates indicated.
At December 31, ------------------------------------------------------------------------- 1999 1998 1997 --------------------- -------------------- -------------------- Amortized Market Amortized Market Amortized Market Cost Value Cost Value Cost Value --------- ------ --------- ------ --------- ------ (In thousands) Held to Maturity: U.S. Government and agency obligations............... $1,000 $995 $1,000 $980 $3,500 $3,444 Available for Sale: U.S. Government and agency obligations............... --- --- --- --- 498 494 Commercial paper................... 2,972 2,957 --- --- --- --- Corporate bonds.................... 1,000 1,000 --- --- --- --- Muncipal securities................ 276 273 276 283 276 278 FHLB stock............................ 943 943 943 943 943 943 ------ ------ ------ ------ ------ ------ Total available for sale........... 5,191 5,173 1,219 1,226 1,717 1,715 ------ ------ ------ ------ ------ ------ Total investments................ $6,191 $6,168 $2,219 $2,206 $5,217 $5,159 ====== ====== ====== ====== ====== ======
The following table sets forth the amount of investment securities (excluding FHLB stock) which mature during each of the periods indicated and the weighted average yields for each range of maturities at December 31, 1999.
Amount at December 31, 1999 which matures in ----------------------------------------------------------------------------------- One Year One Year Five Years After or Less to Five Years to Ten Years Ten Years ------------------- ------------------ ------------------ ------------------ Amortized Average Amortized Average Amortized Average Amortized Average Cost Yield Cost Yield Cost Yield Cost Yield --------- ------- --------- ------- --------- ------- --------- ------- (Dollars in thousands) U.S. Government and agency obligations.......... $1,000 5.03% $ --- ---% $ --- ---% $ --- ---% Commercial paper................................ 2,972 6.01 --- --- --- --- --- --- Corporate bonds................................. 1,000 6.05 --- --- --- --- --- --- Municipal securities............................ --- --- 276 4.63 --- --- --- ---
Mortgage-Backed Securities. The Bank maintains a portfolio of mortgage-backed pass-through securities in the form of FHLMC, FNMA and Government National Mortgage Association ("GNMA") participation certificates. Mortgage-backed pass-through securities generally entitle the Bank to receive a portion of the cash flows from an identified pool of mortgages and gives the Bank an interest in that pool of mortgages. FHLMC, FNMA and GNMA securities are each guaranteed by its respective agencies as to principal and interest. Except for a $15,000 investment in interest-only certificates, the Bank does not invest in any derivative products. Although mortgage-backed securities generally yield less than individual loans originated by the Bank, they present less credit risk. Because mortgage-backed securities have a lower yield relative to current market rates, retention of such investments could adversely affect the Bank's earnings, particularly in a rising interest rate environment. The mortgage-backed securities portfolio is generally considered to have very low credit risk because they are guaranteed as to principal repayment by the issuing agency. In addition, the Bank has purchased adjustable-rate mortgage-backed securities as part of its effort to reduce its interest rate risk. In a period of declining interest rates, the Bank is subject to prepayment risk on such adjustable rate mortgage-backed securities. The Bank attempts to mitigate this prepayment risk by purchasing mortgage-backed securities at or near par. If interest rates rise in general, the interest rates on the loans backing the mortgage-backed securities will also adjust upward, subject to the interest rate caps in the underlying mortgage loans. However, the Bank is still subject to interest rate risk on such securities if interest rates rise faster than 1% to 2% maximum annual interest rate adjustments on the underlying loans. At December 31, 1999, the Bank had $4.2 million of mortgage-backed securities outstanding, $2.1 million of which were classified as held to maturity, and $2.1 million of which were classified as available for sale. These mortgage-backed securities may be used as collateral for borrowings and, through repayments, as a source of liquidity. The following table sets forth the amortized cost and market value of the Bank's mortgage-backed securities at the dates indicated.
At December 31, -------------------------------------------------------------------------- 1999 1998 1997 --------------------- -------------------- -------------------- Amortized Market Amortized Market Amortized Market Cost Value Cost Value Cost Value --------- ------ --------- ------ --------- ------ (In thousands) Held to Maturity: Mortgage-backed securities.................. $2,138 $2,147 $3,190 $3,220 $5,374 $5,432 Available for Sale: Government agency securities........... 1,511 1,466 2,196 2,177 3,023 2,992 Collateralized mortgage obligations................. 627 605 627 619 627 612 ------ ------ ------ ------ ------ ------ Total mortgage-backed securities.............. $4,276 $4,218 $6,013 $6,016 $9,024 $9,036 ====== ====== ====== ====== ====== ======
The following table sets forth the amount of mortgage-backed securities which mature during each of the periods indicated and the weighted average yields for each range of maturities at December 31, 1999.
Amount at December 31, 1999 which matures in ------------------------------------------------------------------------------ One Year One Year to After or Less Five Years Five Years ----------------------- ----------------------- --------------------- Weighted Weighted Weighted Amortized Average Amortized Average Amortized Average Cost Yield Cost Yield Cost Yield --------- -------- --------- -------- --------- -------- (Dollars in thousands) Mortgage-backed securities held to maturity............................. $857 4.93% $ 3 7.57% $1,278 6.29% Mortgage-backed securities available for sale........................... 8 7.09 235 6.54 1,895 6.25 ---- ---- ------ Total...................................... $865 $238 $3,173 ==== ==== ======
The following table sets forth the changes in the Bank's mortgage-backed securities portfolio for the years ended December 31, 1999, 1998 and 1997. Year Ended December 31, -------------------------------- 1999 1998 1997 ------ ------ ------ (In thousands) Beginning balance........................... $5,986 $8,978 $12,846 Purchases................................... --- --- 1,350 Sales ..................................... --- --- (2,150) Repayments.................................. (1,709) (2,970) (3,072) Premium and discount amortization, net........................ (30) (40) (1) Unrealized gains (losses) on securities available for sale....................... (38) 18 5 ------ ------ ------ Ending balance.............................. $4,209 $5,986 $8,978 ====== ====== ====== Sources of Funds General. Deposits have traditionally been the Bank's primary source of funds for use in lending and investment activities. In addition to deposits, the Bank derives funds from scheduled loan payments, investment maturities, loan prepayments, retained earnings, income on earning assets and borrowings. While scheduled loan payments and income on earning assets are relatively stable sources of funds, deposit inflows and outflows can vary widely and are influenced by prevailing interest rates, market conditions and levels of competition. Borrowings from the FHLB of Indianapolis may be used in the short-term to compensate for reductions in deposits or deposit inflows at less than projected levels. Deposits. Deposits are attracted, principally from within Jefferson County, through the offering of a broad selection of deposit instruments including fixed-rate certificates of deposit, NOW, MMDAs and other transaction accounts, individual retirement accounts and savings accounts. The Bank does not actively solicit or advertise for deposits outside of Jefferson County. Substantially all of the Bank's depositors are residents of that county. Deposit account terms vary, with the principal differences being the minimum balance required, the amount of time the funds remain on deposit and the interest rate. The Bank does not pay a fee for any deposits it receives. Interest rates paid, maturity terms, service fees and withdrawal penalties are established by the Bank on a periodic basis. Determination of rates and terms are predicated on funds acquisition and liquidity requirements, rates paid by competitors, growth goals and applicable regulations. The Bank relies, in part, on customer service and long-standing relationships with customers to attract and retain its deposits, but also closely prices its deposits in relation to rates offered by its competitors. The flow of deposits is influenced significantly by general economic conditions, changes in money market and prevailing interest rates and competition. The variety of deposit accounts offered by the Bank has allowed it to be competitive in obtaining funds and to respond with flexibility to changes in consumer demand. The Bank has become more susceptible to short-term fluctuations in deposit flows as customers have become more interest rate conscious. The Bank manages the pricing of its deposits in keeping with its asset/liability management and profitability objectives. Based on its experience, the Bank believes that its NOW and MMDAs are relatively stable sources of deposits. However, the ability of the Bank to attract and maintain certificates of deposit, and the rates paid on these deposits, have been and will continue to be significantly affected by market conditions. An analysis of the Bank's deposit accounts by type, maturity and rate at December 31, 1999, is as follows:
Minimum Balance at Weighted Opening December 31, % of Average Type of Account Balance 1999 Deposits Rate - --------------- ----------- ------------ -------- -------- (Dollars in thousands) Withdrawable: Non-interest bearing accounts......... $ 100 $ 7,903 6.9% ---% Savings accounts...................... 50 26,640 23.3 3.52 MMDA.................................. 100 6,886 6.0 4.10 NOW accounts.......................... 100 14,329 12.6 2.62 -------- ----- ---- Total withdrawable.................. 55,758 48.8 2.86 Certificates (original terms): I.R.A................................. 250 6,891 6.0 4.67 3 months.............................. 2,500 329 .3 4.31 6 months.............................. 2,500 6,940 6.1 4.55 9 months.............................. 2,500 1,025 .9 4.62 12 months............................. 500 13,880 12.1 4.85 15 months............................. 500 6,595 5.8 4.63 18 months............................. 500 820 .7 5.65 24 months............................. 500 339 .3 4.87 30 months ............................ 500 4,720 4.1 5.29 36 months............................. 500 517 .5 5.19 48 months............................. 500 489 .4 5.37 60 months............................. 500 2,063 1.8 5.89 Jumbo certificates....................... 100,000 13,885 12.2 5.07 -------- ----- ---- Total certificates.................... 58,493 51.2 4.90 -------- ----- ---- Total deposits........................... $114,251 100.0% 3.91% ======== ===== ====
The following table sets forth by various interest rate categories the composition of time deposits of the Bank at the dates indicated: At December 31, ------------------------------------------- 1999 1998 1997 ------- ------- ------- (In thousands) 3.01 to 5.00%..... $36,591 $23,200 $13,016 5.01 to 6.00%..... 14,250 31,364 36,010 6.01 to 7.00%..... 7,445 11,229 12,312 7.01 to 8.00%..... 207 214 2,896 8.01 to 9.00%..... --- --- 1 ------- ------- ------- Total.......... $58,493 $66,007 $64,235 ======= ======= ======= The following table represents, by various interest rate categories, the amounts of time deposits maturing during each of the three years following December 31, 1999. Matured certificates, which have not been renewed as of December 31, 1999, have been allocated based upon certain rollover assumptions. Amounts at December 31, 1999 ------------------------------------------------ One Year Two Three Greater Than or Less Years Years Three Years -------- ------ -------- ------------ (In thousands) 3.01 to 5.00%............ $31,822 $3,168 $ 378 $1,223 5.01 to 6.00%............ 9,676 1,933 2,123 518 6.01 to 7.00%............ 4,265 2,196 974 10 7.01 to 8.00%............ 150 10 23 24 8.01 to 9.00%............ --- --- --- --- ------- ------ ------ ------ Total................. $45,913 $7,307 $3,498 $1,775 ======= ====== ====== ====== The following table indicates the amount of the Bank's jumbo and other certificates of deposit of $100,000 or more by time remaining until maturity as of December 31, 1999. At December 31, 1999 -------------------- Maturity Period (In thousands) Three months or less................................. $ 8,582 Greater than three months through six months......... 1,687 Greater than six months through twelve months........ 2,001 Over twelve months................................... 1,614 ------- Total........................................... $13,884 ======= The following table sets forth the dollar amount of savings deposits in the various types of deposits offered by the Bank at the dates indicated, and the amount of increase or decrease in such deposits as compared to the previous period.
Balance Increase Balance Increase Balance at (Decrease) at (Decrease) at December 31, % of from December 31, % of from December 31, % of 1999 Deposits 1998 1998 Deposits 1997 1997 Deposits -------- ----- ------- -------- ----- ------ -------- ----- (Dollars in thousands) Withdrawable: Non-interest bearing accounts...... $ 7,903 6.9% $ (462) $8,365 7.0% $2,737 $ 5,628 4.9% Savings accounts................... 26,640 23.3 4,262 22,378 19.0 967 21,411 18.7 MMDA............................... 6,886 6.0 (98) 6,984 5.9 (1,273) 8,257 7.2 NOW accounts....................... 14,329 12.6 (88) 14,417 12.2 (1,007) 15,424 13.4 -------- ----- ------- -------- ----- ------ -------- ----- Total withdrawable............... 55,758 48.8 3,614 52,144 44.1 1,424 50,720 44.2 Certificates (original terms): I.R.A.............................. 6,891 6.0 (359) 7,250 6.1 (497) 7,747 6.7 3 months........................... 329 .3 66 263 .2 (115) 378 .3 6 months........................... 6,940 6.1 (298) 7,238 6.1 2,549 4,689 4.1 9 months........................... 1,025 .9 (2,027) 3,052 2.6 1,920 1,132 1.0 12 months.......................... 13,880 12.1 7,298 6,582 5.6 (2,219) 8,801 7.7 15 months.......................... 6,595 5.8 (12,179) 18,774 15.9 2,072 16,702 14.5 18 months.......................... 820 .7 (222) 1,042 .9 (483) 1,525 1.3 24 months.......................... 339 .3 (115) 454 .4 (164) 618 .5 30 months ......................... 4,720 4.1 2,172 2,548 2.2 (2,387) 4,935 4.3 36 months.......................... 517 .5 (85) 602 .5 (2,234) 2,836 2.5 48 months.......................... 489 .4 (136) 625 .5 (133) 758 .7 60 months.......................... 2,063 1.8 (172) 2,235 1.9 (667) 2,902 2.5 96 months.......................... --- --- (219) 219 .2 1 218 .2 Jumbo certificates.................... 13,885 12.2 (1,238) 15,123 12.8 4,129 10,994 9.5 -------- ----- ------- -------- ----- ------ -------- ----- Total certificates................. 58,493 51.2 (7,514) 66,007 55.9 1,772 64,235 55.8 -------- ----- ------- -------- ----- ------ -------- ----- Total deposits........................ $114,251 100.0% $(3,900) $118,151 100.0% $3,196 $114,955 100.0% ======== ===== ======= ======== ===== ====== ======== =====
Borrowings. The Bank focuses on generating high quality loans and then seeks the best source of funding from deposits, investments, or borrowings. At December 31, 1999, the Bank had $500,000 in other borrowed money consisting of a variable-rate one-year line of credit advance. The Bank does not anticipate any difficulty in obtaining advances appropriate to meet its requirements in the future. The following table presents certain information relating to the Bank's borrowings at or for the years ended December 31, 1999, 1998 and 1997.
At or for the Year Ended December 31, ------------------------------------------- 1999 1998 1997 ---- ---- ---- (Dollars in thousands) FHLB Advances and Other Borrowed Money: Outstanding at end of period.............. $6,500 $ 270 $2,000 Average balance outstanding for period.... 2,228 2,549 2,244 Maximum amount outstanding at any month-end during the period............. 6,500 5,000 5,000 Weighted average interest rate during the period....................... 6.43% 6.28% 6.02% Weighted average interest rate at end of period........................ 6.07% 6.63% 6.12%
Service Corporation Subsidiaries Prior to the Acquisition and Conversion, the Bank had two subsidiaries: Madison First Service Corporation ("First Service") and McCauley Insurance Agency, Inc. ("McCauley"). First Service was incorporated under the laws of the State of Indiana on July 3, 1973 and owned all of the outstanding capital stock of McCauley. First Service had no other operations. McCauley was organized under the laws of the State of Indiana under the name Builders Insurance Agency, Inc. on August 2, 1957 and changed its name to McCauley Insurance Agency, Inc. on August 29, 1957. McCauley engaged in the sale of general fire and accident, car, home and life insurance to the general public. During the period ended December 31, 1996, McCauley received approximately $200,000 in commissions. Upon consummation of the Acquisition, the Bank became a bank holding company, subject to the Bank Holding Company Act of 1956, as amended (the "BHCA"). At that time, the insurance operations of McCauley were not permitted under the BHCA, and the Bank was required to divest its ownership of McCauley. On December 17, 1996, the Bank sold McCauley to the Madison Insurance Agency, Inc. for a gain of $141,000. The Bank continues to hold First Service which currently holds rental property but does not otherwise engage in significant business activities. The historic consolidated statements of earnings of the Bank and its subsidiaries included elsewhere herein include the operations of First Service and McCauley for the periods prior to the Holding Company's divestment of its ownership of McCauley. All intercompany balances and transactions have been eliminated in the consolidation. Employees As of December 31, 1999, the Bank employed 54 persons on a full-time basis and five persons on a part-time basis. None of the employees is represented by a collective bargaining group. Management considers its employee relations to be good. COMPETITION The Bank originates most of its loans to and accepts most of its deposits from residents of Jefferson County, Indiana. The Bank is subject to competition from various financial institutions, including state and national banks, state and federal savings associations, credit unions and certain nonbanking consumer lenders that provide similar services in Jefferson County and which have significantly larger resources available to them than does the Bank. In total, there are 10 financial institutions located in Jefferson County, Indiana, including the Bank. The Bank also competes with money market funds with respect to deposit accounts and with insurance companies with respect to individual retirement accounts. The primary factors influencing competition for deposits are interest rates, service and convenience of office locations. The Bank competes for loan originations primarily through the efficiency and quality of services they provide borrowers and through interest rates and loan fees charged. Competition is affected by, among other things, the general availability of lendable funds, general and local economic conditions, current interest rate levels and other factors that are not readily predictable. REGULATION General As a federally chartered, SAIF-insured savings association, the Bank is subject to extensive regulation by the OTS and the FDIC. For example, the Bank must obtain OTS approval before it may engage in certain activities and must file reports with the OTS regarding its activities and financial condition. The OTS periodically examines the Bank's books and records and, in conjunction with the FDIC in certain situations, has examination and enforcement powers. This supervision and regulation are intended primarily for the protection of depositors and the federal deposit insurance funds. A savings association must pay a semi-annual assessment to the OTS based upon a marginal assessment rate that decreases as the asset size of the savings association increases, and which includes a fixed-cost component that is assessed on all savings associations. The assessment rate that applies to a savings association depends upon the institution's size, condition and the complexity of its operations. The Bank's semi-annual assessment is approximately $19,000. The Bank is also subject to federal and state regulation as to such matters as loans to officers, directors, or principal shareholders, required reserves, limitations as to the nature and amount of its loans and investments, regulatory approval of any merger or consolidation, issuances or retirements of its securities, and limitations upon other aspects of banking operations. In addition, the Bank's activities and operations are subject to a number of additional detailed, complex and sometimes overlapping federal and state laws and regulations. These include state usury and consumer credit laws, state laws relating to fiduciaries, the Federal Truth-In-Lending Act and Regulation Z, the Federal Equal Credit Opportunity Act and Regulation B, the Fair Credit Reporting Act, the Community Reinvestment Act, anti-redlining legislation and antitrust laws. Savings and Loan Holding Company Regulation As the holding company for the Bank, the Holding Company is regulated as a "non-diversified savings and loan holding company" within the meaning of the Home Owners' Loan Act, as amended ("HOLA"), and is subject to regulatory oversight of the Director of the OTS. As such, the Holding Company is registered with the OTS and is thereby subject to OTS regulations, examinations, supervision and reporting requirements. As a subsidiary of a savings and loan holding company, the Bank is subject to certain restrictions in its dealings with the Holding Company and with other companies affiliated with the Holding Company. In general, the HOLA prohibits a savings and loan holding company, without obtaining the prior approval of the Director of the OTS, from acquiring control of another savings association or savings and loan holding company or retaining more than 5% of the voting shares of a savings association or of another holding company which is not a subsidiary. The HOLA also restricts the ability of a director or officer of the Holding Company, or any person who owns more than 25% of the Holding Company's stock, from acquiring control of another savings association or savings and loan holding company without obtaining the prior approval of the Director of the OTS. The Holding Company currently operates as a unitary savings and loan holding company. Prior to the enactment of the Gramm-Leach-Bliley Act (the "GLB Act") on November 12, 1999, there were no restrictions on the permissible business activities of a unitary savings and loan holding company. The GLB Act included a provision that prohibits any new unitary savings and loan holding company, defined as a company that acquires a thrift after May 4, 1999, from engaging in commercial activities. This provision also includes a grandfather clause, however, that permits a company that was a savings and loan holding company as of May 4, 1999, or had an application to become a savings and loan holding company on file with the OTS as of that date, to acquire and continue to control a thrift and to continue to engage in commercial activities. Because the Holding Company qualifies under this grandfather provision, the GLB Act did not affect the Holding Company's authority to engage in diversified business activities. Notwithstanding the above rules as to permissible business activities of unitary savings and loan holding companies, if the savings association subsidiary of such a holding company fails to meet the Qualified Thrift Lender ("QTL") test, then such unitary holding company would be deemed to be a bank holding company subject to all of the provisions of the Bank Holding Company Act of 1956 and other statutes applicable to bank holding companies, to the same extent as if the Holding Company were a bank holding company and the Bank were a bank. See "-Qualified Thrift Lender." At December 31, 1999, the Bank's asset composition was in excess of that required to qualify as a Qualified Thrift Lender. If the Holding Company were to acquire control of another savings association other than through a merger or other business combination with the Bank, the Holding Company would thereupon become a multiple savings and loan holding company. Except where such acquisition is pursuant to the authority to approve emergency thrift acquisitions and where each subsidiary savings association meets the QTL test, the activities of the Holding Company and any of its subsidiaries (other than the Bank or other subsidiary savings associations) would thereafter be subject to further restrictions. The HOLA provides that, among other things, no multiple savings and loan holding company or subsidiary thereof which is not a savings association shall commence or continue for a limited period of time after becoming a multiple savings and loan holding company or subsidiary thereof, any business activity other than (i) furnishing or performing management services for a subsidiary savings association, (ii) conducting an insurance agency or escrow business, (iii) holding, managing, or liquidating assets owned by or acquired from a subsidiary savings association, (iv) holding or managing properties used or occupied by a subsidiary savings association, (v) acting as trustee under deeds of trust, (vi) those activities previously directly authorized by the FSLIC by regulation as of March 5, 1987, to be engaged in by multiple holding companies, or (vii) those activities authorized by the FRB as permissible for bank holding companies, unless the Director of the OTS by regulation prohibits or limits such activities for savings and loan holding companies. Those activities described in (vii) above must also be approved by the Director of the OTS before a multiple holding company may engage in such activities. The Director of the OTS may also approve acquisitions resulting in the formation of a multiple savings and loan holding company which controls savings associations in more than one state, if the multiple savings and loan holding company involved controls a savings association which operated a home or branch office in the state of the association to be acquired as of March 5, 1987, or if the laws of the state in which the association to be acquired is located specifically permit associations to be acquired by state-chartered associations or savings and loan holding companies located in the state where the acquiring entity is located (or by a holding company that controls such state-chartered savings associations). Also, the Director of the OTS may approve an acquisition resulting in a multiple savings and loan holding company controlling savings associations in more than one state in the case of certain emergency thrift acquisitions. Indiana law permits federal and state savings association holding companies with their home offices located outside of Indiana to acquire savings associations whose home offices are located in Indiana and savings association holding companies with their principal place of business in Indiana ("Indiana Savings Association Holding Companies") upon receipt of approval by the Indiana Department of Financial Institutions. Moreover, Indiana Savings Association Holding Companies may acquire savings associations with their home offices located outside of Indiana and savings association holding companies with their principal place of business located outside of Indiana upon receipt of approval by the Indiana Department of Financial Institutions. No subsidiary savings association of a savings and loan holding company may declare or pay a dividend on its permanent or nonwithdrawable stock unless it first gives the Director of the OTS 30 days advance notice of such declaration and payment. Any dividend declared during such period or without giving notice shall be invalid. Federal Home Loan Bank System The Bank is a member of the FHLB of Indianapolis, which is one of twelve regional FHLBs. Each FHLB serves as a reserve or central bank for its members within its assigned region. The FHLB is funded primarily from funds deposited by savings associations and proceeds derived from the sale of consolidated obligations of the FHLB system. It makes loans to members (i.e., advances) in accordance with policies and procedures established by the Board of Directors of the FHLB. All FHLB advances must be fully secured by sufficient collateral as determined by the FHLB. The Federal Housing Finance Board ("FHFB"), an independent agency, controls the FHLB System, including the FHLB of Indianapolis. Prior to the enactment of the GLB Act, a federal savings association was required to become a member of the FHLB for the district in which the thrift is located. The GLB Act abolished this requirement, effective six months following the enactment of the statute. At that time, membership with the FHLB will become voluntary. Any savings association that chooses to become (or remain) a member of the FHLB following the expiration of this six-month period will have to qualify for membership under the criteria that existed prior to the enactment of the GLB Act. The Bank currently intends to remain a member of the FHLB of Indianapolis. As a member of the FHLB, the Bank is required to purchase and maintain stock in the FHLB of Indianapolis in an amount equal to at least 1% of its aggregate unpaid residential mortgage loans, home purchase contracts, or similar obligations at the beginning of each year. At December 31, 1999, the Bank's investment in stock of the FHLB of Indianapolis was $943,000. The FHLB imposes various limitations on advances such as limiting the amount of certain types of real estate-related collateral to 30% of a member's capital and limiting total advances to a member. Interest rates charged for advances vary depending upon maturity, the cost of funds to the FHLB of Indianapolis and the purpose of the borrowing. The FHLBs are required to provide funds for the resolution of troubled savings associations and to contribute to affordable housing programs through direct loans or interest subsidies on advances targeted for community investment and low-and moderate-income housing projects. These contributions have adversely affected the level of FHLB dividends paid and could continue to do so in the future. For the fiscal year ended December 31, 1999, dividends paid by the FHLB of Indianapolis to the Bank totaled approximately $75,000, for an annual rate of 8.0%. Insurance of Deposits Deposit Insurance. The FDIC is an independent federal agency that insures the deposits, up to prescribed statutory limits, of banks and thrifts and safeguards the safety and soundness of the banking and thrift industries. The FDIC administers two separate insurance funds, the BIF for commercial banks and state savings banks and the SAIF for savings associations such as the Bank, and for banks that have acquired deposits from savings associations. The FDIC is required to maintain designated levels of reserves in each fund. During 1996, the reserves of the SAIF were below the level required by law, primarily because a significant portion of the assessments paid into the SAIF had been used to pay the cost of prior thrift failures, while the reserves of the BIF met the level required by law. In 1996, however, legislation was enacted to recapitalize the SAIF and eliminate the premium disparity between the BIF and SAIF. See "--Assessments" below. Assessments. The FDIC is authorized to establish separate annual assessment rates for deposit insurance for members of the BIF and members of the SAIF. The FDIC may increase assessment rates for either fund if necessary to restore the fund's ratio of reserves to insured deposits to the target level within a reasonable time and may decrease these rates if the target level has been met. The FDIC has established a risk-based assessment system for both SAIF and BIF members. Under this system, assessments vary depending on the risk the institution poses to its deposit insurance fund. An institution's risk level is determined based on its capital level and the FDIC's level of supervisory concern about the institution. In 1996, legislation was enacted that included provisions designed to recapitalize the SAIF and eliminate the significant premium disparity between the BIF and the SAIF. Under the new law, the Bank was charged a one-time special assessment equal to $.657 per $100 in assessable deposits at March 31, 1995. The Bank recognized this one-time assessment as a non-recurring operating expense during the three-month period ending September 30, 1996, and paid this assessment during the fourth quarter of 1996. The assessment was fully deductible for both federal and state income tax purposes. Beginning January 1, 1997, the Bank's annual deposit insurance premium was reduced from .23% to .0644% of total assessable deposits. BIF institutions pay lower assessments than comparable SAIF institutions because BIF institutions pay only 20% of the rate paid by SAIF institutions on their deposits with respect to obligations issued by the federally-chartered corporation which provided some of the financing to resolve the thrift crisis in the 1980's ("FICO"). Although Congress has considered merging the SAIF and the BIF, until then, savings associations with SAIF deposits may not transfer deposits into the BIF system without paying various exit and entrance fees, and SAIF institutions will continue to pay higher FICO assessments. Such exit and entrance fees need not be paid if a SAIF institution converts to a bank charter or merges with a bank, as long as the resulting bank continues to pay applicable insurance assessments to the SAIF, and as long as certain other conditions are met. Savings Association Regulatory Capital Currently, savings associations are subject to three separate minimum capital-to-assets requirements: (i) a leverage limit, (ii) a tangible capital requirement, and (iii) a risk-based capital requirement. The leverage limit requires that savings associations maintain "core capital" of at least 3% of total assets. Core capital is generally defined as common shareholders' equity (including retained earnings), noncumulative perpetual preferred stock and related surplus, certain minority equity interests in subsidiaries, qualifying supervisory goodwill, purchased mortgage servicing rights and purchased credit card relationships (subject to certain limits) less nonqualifying intangibles. The OTS recently amended this requirement to require a core capital level of 3% of total adjusted assets for savings associations that receive the highest supervisory rating for safety and soundness, and no less than 4% for all other savings associations. This amendment became effective April 1, 1999. Under the tangible capital requirement, a savings association must maintain tangible capital (core capital less all intangible assets except purchased mortgage servicing rights which may be included after making the above-noted adjustment in an amount up to 100% of tangible capital) of at least 1.5% of total assets. Under the risk-based capital requirements, a minimum amount of capital must be maintained by a savings association to account for the relative risks inherent in the type and amount of assets held by the savings association. The risk-based capital requirement requires a savings association to maintain capital (defined generally for these purposes as core capital plus general valuation allowances and permanent or maturing capital instruments such as preferred stock and subordinated debt less assets required to be deducted) equal to 8.0% of risk-weighted assets. Assets are ranked as to risk in one of four categories (0-100%). A credit risk-free asset, such as cash, requires no risk-based capital, while an asset with a significant credit risk, such as a non-accrual loan, requires a risk factor of 100%. Moreover, a savings association must deduct from capital, for purposes of meeting the core capital, tangible capital and risk-based capital requirements, its entire investment in and loans to a subsidiary engaged in activities not permissible for a national bank (other than exclusively agency activities for its customers or mortgage banking subsidiaries). At December 31, 1999, the Bank was in compliance with all capital requirements imposed by law. The OTS has promulgated a rule which sets forth the methodology for calculating an interest rate risk component to be used by savings associations in calculating regulatory capital. The OTS has delayed the implementation of this rule, however. The rule requires savings associations with either "above normal" interest rate risk (institutions whose portfolio equity would decline in value by more than 2% of assets in the event of a hypothetical 200-basis-point move in interest rates) to maintain additional capital for interest rate risk under the risk-based capital framework. If the OTS were to implement this regulation, the Bank would be exempt from its provisions because it has less than $300 million in assets and its risk-based capital ratio exceeds 12%. The Bank nevertheless measures its interest rate risk in conformity with the OTS regulation and, as of September 30, 1999 would not have been required to deduct any amounts from its total capital available to calculate its risk-based capital requirement. If an association is not in compliance with the capital requirements, the OTS is required to prohibit asset growth and to impose a capital directive that may restrict, among other things, the payment of dividends and officers' compensation. In addition, the OTS and the FDIC generally are authorized to take enforcement actions against a savings association that fails to meet its capital requirements. These actions may include restricting the operations activities of the association, imposing a capital directive, cease and desist order, or civil money penalties, or imposing harsher measures such as appointing a receiver or conservator or forcing the association to merge into another institution. Prompt Corrective Regulatory Action The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FedICIA") requires, among other things, that federal bank regulatory authorities take "prompt corrective action" with respect to institutions that do not meet minimum capital requirements. For these purposes, FedICIA establishes five capital tiers: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. At December 31, 1999, the Bank was categorized as "well capitalized," meaning that its total risk-based capital ratio exceeded 10%, its Tier I risk-based capital ratio exceeded 6%, its leverage ratio exceeded 5%, and it was not subject to a regulatory order, agreement or directive to meet and maintain a specific capital level for any capital measure. The FDIC may order savings associations which have insufficient capital to take corrective actions. For example, a savings association which is categorized as "undercapitalized" would be subject to growth limitations and would be required to submit a capital restoration plan, and a holding company that controls such a savings association would be required to guarantee that the savings association complies with the restoration plan. "Significantly undercapitalized" savings associations would be subject to additional restrictions. Savings associations deemed by the FDIC to be "critically undercapitalized" would be subject to the appointment of a receiver or conservator. Dividend Limitations The OTS recently adopted a regulation, which became effective on April 1, 1999, that revised the current restrictions that apply to "capital distributions" by savings associations. The amended regulation defines a capital distribution as a distribution of cash or other property to a savings association's owners, made on account of their ownership. This definition includes a savings association's payment of cash dividends to shareholders, or any payment by a savings association to repurchase, redeem, retire, or otherwise acquire any of its shares or debt instruments that are included in total capital, and any extension of credit to finance an affiliate's acquisition of those shares or interests. The amended regulation does not apply to dividends consisting only of a savings association's shares or rights to purchase such shares. The amended regulation exempts certain savings associations from the requirement under the prior version of the regulation that all savings associations file either a notice or an application with the OTS before making any capital distribution. As revised, the regulation requires a savings association to file an application for approval of a proposed capital distribution with the OTS if the association is not eligible for expedited treatment under OTS's application processing rules, or the total amount of all capital distributions, including the proposed capital distribution, for the applicable calendar year would exceed an amount equal to the savings association's net income for that year to date plus the savings association's retained net income for the preceding two years (the "retained net income standard"). A savings association must also file an application for approval of a proposed capital distribution if, following the proposed distribution, the association would not be at least adequately capitalized under the OTS prompt corrective action regulations, or if the proposed distribution would violate a prohibition contained in any applicable statute, regulation, or agreement between the association and the OTS or the FDIC. The amended regulation requires a savings association to file a notice of a proposed capital distribution in lieu of an application if the association or the proposed capital distribution do not meet the conditions described above, and: (1) the savings association will not be at least well capitalized (as defined under the OTS prompt corrective action regulations) following the capital distribution; (2) the capital distribution would reduce the amount of, or retire any part of the savings association's common or preferred stock, or retire any part of debt instruments such as notes or debentures included in the association's capital under the OTS capital regulation; or (3) the savings association is a subsidiary of a savings and loan holding company. Because the Bank is a subsidiary of a savings and loan holding company, this latter provision requires, at a minimum, that the Bank file a notice with the OTS 30 days before making any capital distributions to the Holding Company. In addition to these regulatory restrictions, the Bank's Plan of Conversion imposes additional limitations on the amount of capital distributions it may make to the Holding Company. The Plan of Conversion requires the Bank to establish and maintain a liquidation account for the benefit of Eligible Account Holders and Supplemental Eligible Account Holders and prohibits the Bank from making capital distributions to the Holding Company if its net worth would be reduced below the amount required for the liquidation account. Limitations on Rates Paid for Deposits Regulations promulgated by the FDIC pursuant to FedICIA place limitations on the ability of insured depository institutions to accept, renew or roll over deposits by offering rates of interest which are significantly higher than the prevailing rates of interest on deposits offered by other insured depository institutions having the same type of charter in the institution's normal market area. Under these regulations, "well-capitalized" depository institutions may accept, renew, or roll such deposits over without restriction, "adequately capitalized" depository institutions may accept, renew or roll such deposits over with a waiver from the FDIC (subject to certain restrictions on payments of rates) and "undercapitalized" depository institutions may not accept, renew or roll such deposits over. The regulations contemplate that the definitions of "well capitalized," "adequately capitalized" and "undercapitalized" will be the same as the definition adopted by the agencies to implement the corrective action provisions of FedICIA. Management does not believe that these regulations will have a materially adverse effect on the Bank's current operations. Liquidity Federal law requires that savings associations maintain an average daily balance of liquid assets in a minimum amount not less than 4% or more than 10% of their withdrawable accounts plus short-term borrowings. Liquid assets include cash, certain time deposits, certain bankers' acceptances, specified U.S. government, state or federal agency obligations, certain corporate debt securities, commercial paper, certain mutual funds, certain mortgage-related securities, and certain first-lien residential mortgage loans. The OTS recently amended its regulation that implements this statutory liquidity requirement to reduce the amount of liquid assets a savings association must hold from 5% of net withdrawable accounts and short-term borrowings to 4%. The OTS also eliminated the requirement that savings associations maintain short-term liquid assets constituting at least 1% of their average daily balance of net withdrawable deposit accounts and current borrowings. The revised OTS rule also permits savings associations to calculate compliance with the liquidity requirement based upon their average daily balance of liquid assets during each quarter rather than during each month, as was required under the prior rule. The OTS may impose monetary penalties on savings associations that fail to meet these liquidity requirements. As of December 31, 1999, the Bank had liquid assets of $8.1 million, and a regulatory liquidity ratio of 28.2%. Safety and Soundness Standards In 1995, the federal banking agencies adopted final safety and soundness standards for all insured depository institutions. The standards, which were issued in the form of guidelines rather than regulations, relate to internal controls, information systems, internal audit systems, loan underwriting and documentation, compensation and interest rate exposure. In general, the standards are designed to assist the federal banking agencies in identifying and addressing problems at insured depository institutions before capital becomes impaired. If an institution fails to meet these standards, the appropriate federal banking agency may require the institution to submit a compliance plan. Failure to submit a compliance plan may result in enforcement proceedings. During 1996, the federal banking agencies added asset quality and earning standards to the safety and soundness guidelines. Real Estate Lending Standards OTS regulations require savings associations to establish and maintain written internal real estate lending policies. Each association's lending policies must be consistent with safe and sound banking practices and be appropriate to the size of the association and the nature and scope of its operations. The policies must establish loan portfolio diversification standards; establish prudent underwriting standards, including loan-to-value limits, that are clear and measurable; establish loan administration procedures for the association's real estate portfolio; and establish documentation, approval and reporting requirements to monitor compliance with the association's real estate lending policies. The association's written real estate lending policies must be reviewed and approved by the association's Board of Directors at least annually. Further, each association is expected to monitor conditions in its real estate market to ensure that its lending policies continue to be appropriate for current market conditions. Loans to One Borrower Under OTS regulations, the Bank may not make a loan or extend credit to a single or related group of borrowers in excess of 15% of its unimpaired capital and surplus. Additional amounts may be lent, not in excess of 10% of unimpaired capital and surplus, if such loans or extensions of credit are fully secured by readily marketable collateral, including certain debt and equity securities but not including real estate. In some cases, a savings association may lend up to 30 percent of unimpaired capital and surplus to one borrower for purposes of developing domestic residential housing, provided that the association meets its regulatory capital requirements and the OTS authorizes the association to use this expanded lending authority. At December 31, 1999, the Bank did not have any loans or extensions of credit to a single or related group of borrowers in excess of its lending limits. Management does not believe that the loans-to-one-borrower limits will have a significant impact on the Bank's business operations or earnings. Qualified Thrift Lender Savings associations must meet a QTL test that requires the association to maintain an appropriate level of qualified thrift investments ("QTIs") (primarily residential mortgages and related investments, including certain mortgage-related securities) and otherwise to qualify as a QTL. The required percentage of QTIs is 65% of portfolio assets (defined as all assets minus intangible assets, property used by the association in conducting its business and liquid assets equal to 10% of total assets). Certain assets are subject to a percentage limitation of 20% of portfolio assets. In addition, savings associations may include shares of stock of the FHLBs, FNMA, and FHLMC as QTIs. Compliance with the QTL test is determined on a monthly basis in nine out of every twelve months. As of December 31, 1999, the Bank was in compliance with its QTL requirement, with approximately 85% of its portfolio assets invested in QTIs. A savings association which fails to meet the QTL test must either convert to a bank (but its deposit insurance assessments and payments will be those of and paid to the SAIF) or be subject to the following penalties: (i) it may not enter into any new activity except for those permissible for a national bank and for a savings association; (ii) its branching activities shall be limited to those of a national bank; (iii) it shall be bound by regulations applicable to national banks respecting payment of dividends. Three years after failing the QTL test the association must dispose of any investment or activity not permissible for a national bank and a savings association. If such a savings association is controlled by a savings and loan holding company, then such holding company must, within a prescribed time period, become registered as a bank holding company and become subject to all rules and regulations applicable to bank holding companies (including restrictions as to the scope of permissible business activities). Acquisitions or Dispositions and Branching The Bank Holding Company Act specifically authorizes a bank holding company, upon receipt of appropriate regulatory approvals, to acquire control of any savings association or holding company thereof wherever located. Similarly, a savings and loan holding company may acquire control of a bank. Moreover, federal savings associations may acquire or be acquired by any insured depository institution. Regulations promulgated by the FRB restrict the branching authority of savings associations acquired by bank holding companies. Savings associations acquired by bank holding companies may be converted to banks if they continue to pay SAIF premiums, but as such they become subject to branching and activity restrictions applicable to banks. Subject to certain exceptions, commonly-controlled banks and savings associations must reimburse the FDIC for any losses suffered in connection with a failed bank or savings association affiliate. Institutions are commonly controlled if one is owned by another or if both are owned by the same holding company. Such claims by the FDIC under this provision are subordinate to claims of depositors, secured creditors, and holders of subordinated debt, other than affiliates. The OTS has adopted regulations which permit nationwide branching to the extent permitted by federal statute. Federal statutes permit federal savings associations to branch outside of their home state if the association meets the domestic building and loan test in ss.7701(a)(19) of the Code or the asset composition test of ss.7701(c) of the Code. Branching that would result in the formation of a multiple savings and loan holding company controlling savings associations in more than one state is permitted if the law of the state in which the savings association to be acquired is located specifically authorizes acquisitions of its state-chartered associations by state-chartered associations or their holding companies in the state where the acquiring association or holding company is located. Moreover, Indiana banks and savings associations are permitted to acquire other Indiana banks and savings associations and to establish branches throughout Indiana. Finally, The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the "Riegle-Neal Act") permits bank holding companies to acquire banks in other states and, with state consent and subject to certain limitations, allows banks to acquire out-of-state branches either through merger or de novo expansion. The State of Indiana enacted legislation establishing interstate branching provisions for Indiana state-chartered banks consistent with those established by the Riegle-Neal Act (the "Indiana Branching Law"). The Indiana Branching Law, which became effective in 1996, authorizes Indiana banks to branch interstate by merger or de novo expansion, provided that such transactions are not permitted to out-of-state banks unless the laws of their home states permit Indiana banks to merge or establish de novo banks on a reciprocal basis. Transactions with Affiliates The Bank is subject to Sections 22(h), 23A and 23B of the Federal Reserve Act, which restrict financial transactions between financial institutions and affiliated companies. The statute limits credit transactions between a bank or savings association and its executive officers and its affiliates, prescribes terms and conditions deemed to be consistent with safe and sound banking practices for transactions between a financial institution and its affiliates, and restricts the types of collateral security permitted in connection with a financial institution's extension of credit to an affiliate. Federal Securities Law The shares of Common Stock of the Holding Company have been registered with the SEC under the 1934 Act. The Holding Company is subject to the information, proxy solicitation, insider trading restrictions and other requirements of the 1934 Act and the rules of the SEC thereunder. After three years following the Bank's conversion to stock form, if the Holding Company has fewer than 300 shareholders, it may deregister its shares under the 1934 Act and cease to be subject to the foregoing requirements. Shares of Common Stock held by persons who are affiliates of the Holding Company may not be resold without registration unless sold in accordance with the resale restrictions of Rule 144 under the 1933 Act. If the Holding Company meets the current public information requirements under Rule 144, each affiliate of the Holding Company who complies with the other conditions of Rule 144 (including those that require the affiliate's sale to be aggregated with those of certain other persons) would be able to sell in the public market, without registration, a number of shares not to exceed, in any three-month period, the greater of (i) 1% of the outstanding shares of the Holding Company or (ii) the average weekly volume of trading in such shares during the preceding four calendar weeks. Community Reinvestment Act Matters Federal law requires that ratings of depository institutions under the Community Reinvestment Act of 1977 ("CRA") be disclosed. The disclosure includes both a four-unit descriptive rating - outstanding, satisfactory, needs to improve, and substantial noncompliance - and a written evaluation of an institution's performance. Each FHLB is required to establish standards of community investment or service that its members must maintain for continued access to long-term advances from the FHLBs. The standards take into account a member's performance under the CRA and its record of lending to first-time home buyers. The OTS has designated the Bank's record of meeting community credit needs as satisfactory. TAXATION Federal Taxation Historically, savings associations, such as the Bank, have been permitted to compute bad debt deductions using either the bank experience method or the percentage of taxable income method. However, for years beginning after December 31, 1995, the Bank can no longer use the percentage of taxable income method of computing its allowable tax bad debt deduction and instead must compute its allowable deduction using the experience method. As a result of the repeal of the percentage of taxable income method, reserves taken after 1987 using the percentage of taxable income method generally must be included in future taxable income over a six-year period, although a two-year delay may be permitted for institutions meeting a residential mortgage loan origination test. In addition, the pre-1988 reserve, for which no deferred taxes have been recorded, will not have to be recaptured into income unless (i) the Bank no longer qualifies as a bank under the Code or (ii) excess dividends or distributions are paid out by the Bank. Depending on the composition of its items of income and expense, a savings association may be subject to the alternative minimum tax. A savings association must pay an alternative minimum tax equal to the amount (if any) by which 20% of alternative minimum taxable income ("AMTI"), as reduced by an exemption varying with AMTI, exceeds the regular tax due. AMTI equals regular taxable income increased or decreased by certain tax preferences and adjustments, including depreciation deductions in excess of that allowable for alternative minimum tax purposes, tax-exempt interest on most private activity bonds issued after August 7, 1986 (reduced by any related interest expense disallowed for regular tax purposes), the amount of the bad debt reserve deduction claimed in excess of the deduction based on the experience method and 75% of the excess of adjusted current earnings over AMTI (before this adjustment and before any alternative tax net operating loss). AMTI may be reduced only up to 90% by net operating loss carryovers, but alternative minimum tax paid can be credited against regular tax due in later years. For federal income tax purposes, the Bank has been reporting its income and expenses on the accrual method of accounting. The Bank's federal income tax returns have not been audited in recent years. The Holding Company and the Bank do not anticipate electing to file a consolidated federal income tax return for 1999. Accordingly, the Bank will be taxed separately on its earnings. The Holding Company is taxed as an ordinary corporation. State Taxation The Bank and the Holding Company are subject to Indiana's Financial Bank Tax ("IFBT"), which is imposed at a flat rate of 8.5% on "adjusted gross income." "Adjusted gross income," for purposes of IFBT, begins with taxable income as defined by Section 63 of the Code and, thus, incorporates federal tax law to the extent that it affects the computation of taxable income. Federal taxable income is then adjusted by several Indiana modifications. Other applicable state taxes include generally applicable sales and use taxes plus real and personal property taxes. The Bank's state income tax returns have not been audited in recent years. Item 2. Properties. The following table provides certain information with respect to the Bank's offices as of December 31, 1999. Net Book Value of Property, Year Furniture, Approximate Opened or Fixtures and Square Description and Address Acquired Equipment Footage - ----------------------- -------- --------- ------- (Dollars in thousands) Locations in Madison, Indiana Downtown Offices: 233 E. Main Street.............. 1952 $233 9,110 Drive-Through Branch: 401 E. Main Street.............. 1984 48 375 Hilltop Locations: 303 Clifty Drive................ 1973 525 3,250 430 Clifty Drive................ 1983 605 6,084 Wal-mart Banking Center 567 Ivy Tech Drive.............. 1995 5 517 Locations in Hanover, Indiana 10 Medical Plaza Drive.......... 1995 175 656 The following table provides certain information with respect to real estate owned by the Bank as of December 31, 1999. These properties were acquired by the Bank for future expansion of its banking operations. Address ---------------------- 225 E. Main Street Madison, Indiana 47250 227 E. Main Street Madison, Indiana 47250 The Bank owns computer and data processing equipment which is used for transaction processing, loan origination, and accounting. The net book value of electronic data processing equipment owned by the Bank was approximately $236,000 at December 31, 1999. The Bank operates six automated teller machines ("ATMs"), one at each office location and one at Hanover College. The Bank's ATMs participate in the MAC(R) and MagicLine(R) networks. Prior to the effective date of the Merger, the Bank had contracted for the data processing and reporting services of BISYS, Inc. in Houston, Texas. Following the Merger, the Bank performs these services in-house. Item 3. Legal Proceedings. Neither the Holding Company nor the Bank is a party to any pending legal proceedings, other than routine litigation incidental to the Holding Company's or the Bank's business. Item 4. Submission of Matters to a Vote of Security Holders. No matter was submitted to a vote of the Holding Company's shareholders during the quarter ended December 31, 1999. Item 4.5. Executive Officers of the Registrant. The executive officers of the Holding Company are identified below. The executive officers of the Bank are elected annually by the Holding Company's Board of Directors. Position with the Position with Name Holding Company the Bank - -------------------------------------------------------------------------------- Matthew P. Forrester President and Chief President and Chief Executive Officer Executive Officer Lonnie D. Collins Secretary Secretary Larry C. Fouse Vice President of Finance Vice President of Finance Matthew P. Forrester (age 43) has served as the Bank and Holding Company President and Chief Executive Officer since October, 1999. Prior to that Mr. Forrester served as the Chief Financial Officer for Home Loan Bank in Fort Wayne, Indiana and Senior Vice President and Treasurer for its holding company, Home Bancorp. Prior to joining Home Loan Bank Mr. Forrester was an examiner for the Indiana Department of Financial Institutions. Lonnie D. Collins (age 51) has served as Secretary of the Bank since September, 1994, and as Secretary of the Holding Company since 1996. Mr. Collins has also practiced law since October, 1975 and has served as the Bank's outside counsel since 1980. Larry C. Fouse (age 54) has served as the Holding Company's Controller since 1997. From 1993 to 1997, he served as the Chief Financial Officer and Controller of Citizens, and from 1989 to 1993, served as Citizens' Vice President and Operations Officer. PART II Item 5. Market for Registrant's Common Equity and Related Shareholder Matters. The Holding Company's common stock, without par value ("Common Stock"), is quoted on the National Association of Securities Dealers Automated Quotation System ("NASDAQ"), Small Cap Market, under the symbol "RIVR." The Holding Company's shares began to trade on December 20, 1996. The high and low bid prices for the 1999 fiscal year were $15.75 and $11.50, respectively. Since the Holding Company has no independent operation or other subsidiaries to generate income, its ability to accumulate earnings for the payment of cash dividends to its shareholders directly depends upon the ability of the Bank to pay dividends to the Holding Company and upon the earnings on its investment securities. Under current federal income tax law, dividend distributions to the Holding Company, to the extent that such dividends paid are from the current or accumulated earnings and profits of the Bank (as calculated for federal income tax purposes), will be taxable as ordinary income to the Holding Company and will not be deductible by the Bank. Because the Holding Company and the Bank do not file a consolidated federal income tax return, however, the dividends will be eligible for a 100% dividends-received deduction by the Holding Company. Any dividend distributions in excess of current or accumulated earnings and profits will be treated for federal income tax purposes as a distribution from the Bank's accumulated bad debt reserves, which could result in increased federal income tax liability for the Bank. Moreover, the Bank may not pay dividends to the Holding Company if such dividends would result in the impairment of the liquidation account established in connection with the Conversion. Generally, there is no OTS regulatory restriction on the payment of dividends by the Holding Company unless there is a determination by the Director of the OTS that there is reasonable cause to believe that the payment of dividends constitutes a serious risk to the financial safety, soundness or stability of the Bank. The FDIC also has authority under current law to prohibit a bank from paying dividends if, in its opinion, the payment of dividends would constitute an unsafe or unsound practice in light of the Bank's financial condition. Indiana law, however, would prohibit the Holding Company from paying a dividend, if, after giving effect to the payment of that dividend, the Holding Company would not be able to pay its debts as they become due in the usual course of business or the Holding Company's total assets would be less than the sum of its total liabilities plus preferential rights of holders of preferred stock, if any. The Holding Company paid dividends to its shareholders in 1999 in the amount of $.265 per outstanding share of common stock. Item 6. Selected Consolidated Financial Data. The information required by this item is incorporated by reference to the material under the heading "Selected Consolidated Financial Data" on pages 4 and 5 of the Holding Company's 1999 Shareholder Annual Report (the "Shareholder Annual Report"). Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation. The information required by this item is incorporated by reference to pages 6 through 18 of the Shareholder Annual Report. Item 7A. Quantitative and Qualitative Analysis of Financial Condition and Results of Operation. The information required by this item is incorporated by reference to pages 13 through 15 of the Shareholder Annual Report. Item 8. Financial Statements and Supplementary Data. The Holding Company's Consolidated Financial Statements and Notes thereto contained on pages 19 through 50 in the Shareholder Annual Report are incorporated herein by reference. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. There were no such changes or disagreements during the applicable period. PART III Item 10. Directors and Executive Officers of the Registrant. The information required by this item with respect to directors is incorporated by reference to pages 2 through 4 and page 9 of the Holding Company's Proxy Statement for its Annual Shareholder Meeting to be held April 19, 2000 (the "2000 Proxy Statement"). Information concerning the Registrant's executive officers is included in Item 4.5 in Part I of this report. Item 11. Executive Compensation. The information required by this item with respect to executive compensation is incorporated by reference to pages 5 through 8 of the 2000 Proxy Statement. Item 12. Security Ownership of Certain Beneficial Owners and Management. The information required by this item is incorporated by reference to pages 2 through 3 of the 2000 Proxy Statement. Item 13. Certain Relationships and Related Transactions. The information required by this item is incorporated by reference to pages 8 and 9 of the 2000 Proxy Statement. PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. (a) List the following documents filed as part of the report: Annual Report Financial Statements Page No. Independent Auditor's Report.....................................19 Consolidated Statements of Financial Condition at December 31, 1999, and 1998...................................20 Consolidated Statements of Earnings for the Years Ended December 31, 1999, 1998, and 1997....................22 Consolidated Statements of Comprehensive Income for the Year Ended December 31, 1999, 1998, 1997..............................23 Consolidated Statements of Shareholders' Equity for the Years Ended December 31, 1999, 1998, and 1997.............................................24 Consolidated Statements of Cash Flows for the Years Ended December 31, 1999, 1998, and 1997..........................25 Notes to Consolidated Financial Statements.......................27 (b) Reports on Form 8-K. The Holding Company filed no reports on Form 8-K during the quarter ended December 31, 1999. (c) The exhibits filed herewith or incorporated by reference herein are set forth on the Exhibit Index on page E-1. (d) All schedules are omitted as the required information either is not applicable or is included in the Consolidated Financial Statements or related notes. SIGNATURES Pursuant to the requirement of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on behalf of the undersigned, thereto duly authorized. RIVER VALLEY BANCORP Date: March 23, 2000 By: /s/ Matthew P. Forrester ----------------------------------- Matthew P. Forrester, President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on this 23rd day of March, 2000. Signatures Title Date ---------- -------------- -------------- (1) Principal Executive Officer: /s/ Matthew P. Forrester ) --------------------------- ) Matthew P. Forrester President and ) Chief Executive Officer ) ) ) (2) Principal Financial and ) Accounting Officer: ) ) ) /s/ Larry C. Fouse Treasurer ) --------------------------- ) Larry C. Fouse ) ) ) March 23, 2000 ) (3) The Board of Directors: ) ) ) /s/ Robert W. Anger Director ) --------------------------- ) Robert W. Anger ) ) ) /s/ Jonnie L. Davis Director ) --------------------------- ) Jonnie L. Davis ) ) ) /s/ Matthew P. Forrester Director ) --------------------------- ) Matthew P. Forrester ) ) ) ) /s/ Michael J. Hensley Director ) --------------------------- ) Michael J. Hensley ) ) ) /s/ Earl W. Johann Director ) March 23, 2000 --------------------------- ) Earl W. Johann ) ) ) /s/ Fred W. Koehler Director ) --------------------------- ) Fred W. Koehler ) ) EXHIBIT INDEX Exhibit No. Description Page 2 Agreement and Plan of Reorganization is incorporated by reference to Exhibit 2 to the Registrant's Form 10-K for the fiscal year ending December 31, 1997. 3(1) Registrant's Articles of Incorporation are incorporated by reference to Exhibit 3(1) to the Registration Statement on Form S-1 (Registration No. 333-05121) (the "Registration Statement") (2) Registrant's Amended Code of By-Laws are incorporated by reference to Exhibit 3(2) to the Registrant's Form 10-K for the fiscal year ending December 31, 1997 10(1) Employment Agreement between River Valley Financial Bank and Matthew P. Forrester is included as Exhibit 10(5) hereto (2) Director Deferred Compensation Master Agreement is incorporated by reference to Exhibit 10(8) to the Registration Statement (3) Director Deferred Compensation Joinder Agreement -- Jerry D. Allen is incorporated by reference to Exhibit 10(9) to the Registration Statement (4) Director Deferred Compensation Joinder Agreement -- Robert W. Anger is incorporated by reference to Exhibit 10(10) to the Registration Statement (5) Director Deferred Compensation Joinder Agreement -- Earl W. Johann is incorporated by reference to Exhibit 10(12) to the Registration Statement (6) Director Deferred Compensation Joinder Agreement -- Frederick W. Koehler is incorporated by reference to Exhibit 10(13) to the Registration Statement (7) Director Deferred Compensation Joinder Agreement -- Michael Hensley is incorporated by reference to Exhibit 10(15) to the Registration Statement (8) Special Termination Agreement between River Valley Financial Bank, as successor to Madison First Federal Savings and Loan Association and Robert W. Anger is incorporated by reference to Exhibit 10(18) to the Registration Statement (9) Special Termination Agreement between River Valley Financial Bank, as successor to Citizens National Bank of Madison and Larry Fouse is incorporated by reference to Exhibit 10(20) to the Registration Statement (10) Special Termination Agreement between River Valley Financial Bank, as successor to Citizens National Bank of Madison and Mark Goley is incorporated by reference to Exhibit 10(21) to the Registration Statement (11) Exempt Loan and Share Purchase Agreement between Trust under River Valley Bancorp Employee Stock Ownership Plan and Trust Agreement and River Valley Bancorp is incorporated by reference to Exhibit 10(22) to the Registration Statement (12) Special Termination Agreement between River Valley Financial Bank, as successor to Citizens National Bank of Madison and Robyne Hart 13 Shareholder Annual Report 21 Subsidiaries of the Registrant 27(1) Financial Data Schedule (Filed Electronically) EX-10.1 2 MATTHEW P. FORRESTER EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT THIS AGREEMENT entered into and effective this 15th day of July, 1999, by and between River Valley Financial Bank, a federal savings bank (the "Bank"), and Matthew P. Forrester (the "Employee"). The parties agree, however, that the "Effective Date" of this Agreement shall be October 12, 1999. WHEREAS, the Employee is being employed by the Bank as its President and as such will perform valuable services for the Bank; and WHEREAS, the Board of Directors of the Bank believes it is in the best interests of the Bank to enter into this Agreement with the Employee in order to assure continuity of management of the Bank and to reinforce and encourage the continued attention and dedication of the Employee to his assigned duties; and WHEREAS, the parties desire by this writing to set forth the continuing employment relationship of the Bank and the Employee. NOW, THEREFORE, it is AGREED as follows: 1. Employment: The Employee is employed as the President of the Bank. The Employee shall render such administrative and management services for the Bank as are currently rendered and as are customarily performed by persons situated in a similar executive capacity. The Employee shall also promote, by entertainment or otherwise, as and to the extent permitted by law, the business of the Bank. The Employee's other duties shall be such as the Board of Directors (the "Board") of the Bank may from time to time reasonably direct, including normal duties as an officer of the Bank. 2. Base Compensation: The Bank agrees to pay the Employee during the term of this Agreement a salary at the rate of $95,000.00 per annum, payable in cash not less frequently than monthly, and shall be effective and calculated commencing the Effective Date. The salary shall be reviewed annually by the Board of Directors of the Bank in February of each year commencing February of 2000 and any adjustment in the future on salary shall be effective on February 1st of each year. 3. Bonuses: The Employee shall participate in any year end bonus granted to other employees by the Board. The Employee shall further participate in an equitable manner with all other senior management employees of the Bank in discretionary bonuses that the Board may award from time to time to the Bank's senior management employees. No other compensation provided for in this Agreement shall be deemed a substitute for the Employee's right to participate in such discretionary bonuses. 4.(a) Participation in Retirement, Medical and Other Plans: During the term of this Agreement, the Employee shall be eligible to participate in the following benefit plans: group hospitalization, disability, health, dental, sick leave, retirement, pension, and/or other present or future qualified plans provided by the Bank, generally, which benefits, taken as a whole, must be at least as favorable as those in effect on the Effective Date, unless the continued operation of such plans would adversely affect the Bank's operating results or financial condition in a material way, the Bank's Board of Directors concludes that modifications to such plans are necessary to avoid such adverse effects and such modifications apply consistently to all employees of the Bank. (b) Employee Benefits: Expenses: The Employee shall be eligible to participate in any fringe benefits which are or may become available to the Bank's senior management employees, including, for example, any stock option or incentive compensation plans, and any other benefits which are commensurate with the responsibilities and functions to be performed by the Employee under this Agreement. The Employee shall be reimbursed for all reasonable out-of-pocket business expenses which he shall incur in connection with his services under this Agreement, upon substantiation of such expenses in accordance with the policies of the Bank. 5. Term: The Bank hereby employs the Employee, and the Employee hereby accepts such employment under this Agreement, for the period commencing on the Effective Date and ending thirty six months thereafter (or such earlier date as is determined in accordance with Section 9). Additionally, on each annual anniversary date from the Effective Date, the Employee's term of employment shall be extended for an additional one-year period beyond the then effective expiration date, provided the Board determines in a duly adopted resolution that the performance of the Employee has met the Board's requirements and standards, and that this Agreement shall be extended. Only those members of the Board of Directors who have no personal interest in this Employment Agreement shall discuss and vote on the approval and subsequent review of this Agreement. 6. Loyalty; Noncompetition: (a) During the period of his employment hereunder and except for illnesses, reasonable vacation periods, and reasonable leaves of absence, the Employee shall devote all his full business time, attention, skill, and efforts to the faithful performance of his duties hereunder; provided, however, from time to time, the Employee may serve on the Boards of Directors of, and hold any other offices or positions in, companies or organizations, which will not present any conflict of interest with the Bank or any of its subsidiaries or affiliates, or unfavorably affect the performance of Employee's duties pursuant to this Agreement, or will not violate any applicable statute or regulation. "Full business time" is hereby defined as that amount of time usually devoted to like companies by similarly situated executive officers. During the term of his employment under this Agreement, the Employee shall not engage in any business or activity contrary to the business affairs or interests of the Bank, or be gainfully employed in any other position or job other than as provided above. (b) Nothing contained in this Paragraph 6 shall be deemed to prevent or limit the Employee's right to invest in the capital stock or other securities of any business dissimilar from that of the Bank, or, solely as a passive or minority investor, in any business. (c) While Employee is employed by the Bank and for a period of three years after termination of Employee's employment by the Bank or by the Employee for reasons other than those set forth in Section 9 (d) hereof, the Employee shall not directly or indirectly, engage in any bank or bank-related business which competes with the business of the Bank as conducted during Employee's employment by the Bank for any financial institution, including but not limited to banks, savings and loan associations, and credit unions within a forty mile radius of Madison, Indiana. 7. Standards: The Employee shall perform his duties under this Agreement in accordance with such reasonable standards as the Board may establish from time to time. The Bank will provide Employee with the working facilities and staff customary for similar executives and necessary for him to perform his duties. 8. Vacation, Sick Leave and Disability: The Employee shall be entitled to twenty days vacation annually and shall be entitled to the same sick leave and disability leave as other employees of the Bank. The Employee shall not receive any additional compensation from the Bank on account of his failure to take a vacation or sick leave, and the Employee shall not accumulate unused vacation or sick leave from one fiscal year to the next, except in either case to the extent authorized by the Board. In addition to the aforesaid paid vacations, the Employee shall be entitled, without loss of pay, to absent himself voluntarily from the performance of his employment with the Bank for such additional periods of time and for such valid and legitimate reasons as the Board may in its discretion determine. Further, the Board may grant to the Employee a leave or leaves of absence, with or without pay, at such time or times and upon such terms and conditions as such Board in its discretion may determine. 9. Termination and Termination Pay: Subject to Section 11 hereof, the Employee's employment hereunder may be terminated under the following circumstances: (a) Death. The Employee's employment under this Agreement shall terminate upon his death during the term of this Agreement, in which event the Employee's estate shall be entitled to receive the compensation due the Employee through the last day of the calendar month in which his death occurred. (b) Disability. (1) The Bank may terminate the Employee's employment, should the Employee become disabled, in a manner consistent with the Bank's and the Employee's rights and obligations under the Americans With Disabilities Act or other applicable state and federal laws concerning disability. For the purpose of this Agreement, "Disability" means a physical or mental condition which substantially limits the employee's ability to perform the essential functions of his position, as established by this Agreement, and which results in the Employee becoming eligible for long-term disability benefits under the Bank's long-term disability plan. (2) During any period that the Employee shall receive disability benefits and to the extent that the Employee shall be physically and mentally able to do so, he shall furnish such information, assistance and documents so as to assist in the continued ongoing business of the Bank and, if able, shall make himself available to the Bank to undertake reasonable assignments consistent with his prior position and his physical and mental health. The Bank shall pay all reasonable expenses incident to the performance of any assignment given to the Employee during the disability period. (c) Just Cause: The Board may, by written notice to the Employee, immediately terminate his employment at any time, for Just Cause. The Employee shall have no right to receive compensation or other benefits for any period after termination for Just Cause. Termination for "Just Cause" shall mean termination because of, in the good faith determination of the Board, the Employee's personal dishonesty, incompetence, willful misconduct, breach of fiduciary duty involving personal profit, intentional failure to perform stated duties, willful violation of any law, rule or regulation (other than traffic violations or similar offenses) or final cease-and-desist order, or material breach of any provision of this Agreement. Notwithstanding the foregoing, in the event of termination for Just Cause there shall be delivered to the Employee a copy of a resolution duly adopted by the affirmative vote of not less than a majority of the entire membership of the Board at a meeting of the Board called and held for that purpose (after reasonable notice to the Employee and an opportunity for the Employee, together with the Employee's counsel, to be heard before the Board), such meeting and the opportunity to be heard to be held at least 30 days prior to such termination, finding that in the good faith opinion of the Board the Employee was guilty of conduct set forth above in the second sentence of this Subsection (c) and specifying the particulars thereof in detail. (d) Without Just Cause; Constructive Discharge: (1) The Board may, by written notice to the Employee, immediately terminate his employment at any time for a reason other than Just Cause, in which event the Employee shall be entitled to receive the following compensation and benefits (unless such termination occurs within the time period set forth in Section 11(b) hereof, in which event the benefits and compensation provided for in Section 11 shall apply): (i) the salary provided pursuant to Section 2 hereof, up to the date of termination of the term as provided in Section 5 hereof (including any renewal term) of this Agreement (the "Expiration Date"), plus said salary for an additional 12-month period, and (ii) at the Employee's election, either (A) cash in an amount equal to the cost to the Employee of obtaining all health, life, disability and other benefits (excluding stock options) which the Employee would have been eligible to participate in through the Expiration Date, based upon the benefit levels substantially equal to those that the Bank provided for the Employee at the date of termination of employment, or (B) continued participation under such Bank benefit plans through the Expiration Date, but only to the extent the Employee continues to qualify for participation therein. All amounts payable to the Employee shall be paid, at the option of the Employee, either (I) in periodic payments through the Expiration Date, or (II) in one lump sum within ten (10) days of such termination. (2) The Employee may voluntarily terminate his employment under this Agreement, and the Employee shall thereupon be entitled to receive the compensation and benefits payable under Section 9(d)(1) hereof, within ninety (90) days following the occurrence of any of the following events, which has not been consented to in advance by the Employee in writing (unless such voluntary termination occurs within the time period set forth in Section 11(b) hereof, in which event the benefits and compensation provided for in Section 11 shall apply): (i) the requirement that the Employee move his personal residence, or perform his principal executive functions, more than thirty (30) miles from his primary office; (ii) a material reduction in the Employee's base compensation, unless part of an institution-wide reduction; (iii) the failure by the Bank to continue to provide the Employee with compensation and benefits provided for under this Agreement, as the same may be increased from time to time, or with benefits substantially similar to those provided to him under any of the employee benefit plans in which the Employee now or hereafter becomes a participant, or the taking of any action by the Bank which would directly or indirectly reduce any of such benefits or deprive the Employee of any material fringe benefit enjoyed by him, unless part of an institution-wide reduction; (iv) the assignment to the Employee of duties and responsibilities materially different from those normally associated with his position as referenced in Section 1; (v) a failure to elect or re-elect the Employee to the Board of Directors of the Bank; or (vi) a material diminution or reduction in the Employee's responsibilities or authority (including reporting responsibilities) in connection with his employment with the Bank. (3) Notwithstanding the foregoing, but only to the extent required under federal banking law, the amount payable under clause (d)(1)(i) hereof shall be reduced to the extent that on the date of the Employee's termination of employment, the present value of the benefits payable under clauses (d)(1)(i) and (ii) hereof exceeds the limitation on severance benefits that is set forth in Regulatory Bulletin 27a of the Office of Thrift Supervision, as in effect on the Effective Date. In the event that Section 280G of the Internal Revenue Code of 1986, as amended (the "Code"), becomes applicable to payments made under this Section 9(d), and the payments exceed the "Maximum Amount" as defined in Section 11(a)(1) hereof, the payments shall be reduced as provided by Section 11(a)(2) of this Agreement. (e) Termination or Suspension Under Federal Law. (1) If the Employee is removed and/or permanently prohibited from participating in the conduct of the Bank's affairs by an order issued under Sections 8(e)(4) or 8(g)(1) of the Federal Deposit Insurance Act ("FDIA") (12 U.S.C. 1818(e)(4) and (g)(1)), all obligations of the Bank under this Agreement shall terminate, as of the effective date of the order, but vested rights of the parties shall not be affected. (2) If the Bank is in default (as defined in Section 3(x)(1) of FDIA), all obligations under this Agreement shall terminate as of the date of default; however, this Paragraph shall not affect the vested rights of the parties. (3) All obligations under this Agreement shall terminate, except to the extent determined that continuation of this Agreement is necessary for the continued operation of the Bank; (i) by the Director of the Office of Thrift Supervision ("Director of OTS"), or his or her designee, at the time that the Federal Deposit Insurance Corporation ("FDIC") enters into an agreement to provide assistance to or on behalf of the Bank under the authority contained in Section 13(c) of FDIA; or (ii) by the Director of the OTS, or his or her designee, at the time that the Director of the OTS, or his or her designee approves a supervisory merger to resolve problems related to operation of the Bank or when the Bank is determined by the Director of the OTS to be in an unsafe or unsound condition. Such action shall not affect any vested rights of the parties. (4) If a notice served under Section 8(e)(3) or (g)(1) of the FDIA (12 U.S.C. 1818(e)(3) or (g)(1) suspends and/or temporarily prohibits the Employee from participating in the conduct of the Bank's affairs, the Bank's obligations under this Agreement shall be suspended as of the date of such service, unless stayed by appropriate proceedings. If the charges in the notice are dismissed, the Bank may in its discretion (i) pay the Employee all or part of the compensation withheld while its contract obligations were suspended, and (ii) reinstate (in whole or in part) any of its obligations which were suspended. (f) Voluntary Termination by Employee: Subject to Section 11 hereof, the Employee may voluntarily terminate employment with the Bank during the term of this Agreement, upon at least ninety (90) days' prior written notice to the Board of Directors, in which case the Employee shall receive only his compensation, vested rights and employee benefits up to the date of his termination (unless such termination occurs pursuant to Section 9(d)(2) hereof, in which event the benefits and compensation provided for in section 9(d) shall apply). 10. No Mitigation: The Employee shall not be required to mitigate the amount of any payment provided for in this Agreement by seeking other employment or otherwise and no such payment shall be offset or reduced by the amount of any compensation or benefits provided to the Employee in any subsequent employment. 11. Change in Control: (a) Change in Control; Involuntary Termination: (1) Notwithstanding any provision herein to the contrary, if the Employee's employment under this Agreement is terminated by the Bank, without the Employee's prior written consent and for a reason other than Just Cause, in connection with or within twelve (12) months after any Change in Control of the Bank, the Employee shall, subject to paragraph (2) of this Section 11(a), be paid an amount equal to the difference between (i) the product of 2.99 times his "base amount" as defined in Section 280G(b)(3) of the Code and regulations promulgated thereunder (the "Maximum Amount"), and (ii) the sum of any other parachute payments (as defined under Section 280G(b)(2) of the Code) that the Employee receives on account of the Change in Control. Said sum shall be paid in one lump sum within ten (10) days of such termination. This paragraph would not apply to a termination of employment due to death, disability or voluntary termination by the Employee. (2) In the event that the Employee and the Bank jointly determine and agree that the total parachute payments receivable under clauses (i) and (ii) of Section 11(a)(1) hereof exceed the Maximum Amount, notwithstanding the payment procedure set forth in Section 11(a)(1) hereof, the Employee shall determine which and how much, if any, of the parachute payments to which he is entitled shall be eliminated or reduced so that the total parachute payments to be received by the Employee do not exceed the Maximum Amount. If the Employee does not make his determination within ten business days after receiving a written request from the Bank, the Bank may make such determination, and shall notify the Employee promptly thereof. Within five business days of the earlier of the Bank's receipt of the Employee's determination pursuant to this paragraph or the Bank's determination in lieu of a determination by the Employee, the Bank shall pay to or distribute to or for the benefit of the Employee such amounts as are then due the Employee under this Agreement. (3) As a result of uncertainty in application of Section 280G of the Code at the time of payment hereunder, it is possible that such payments will have been made by the Bank which should not have been made ("Overpayment") or that additional payments will not have been made by the Bank which should have been made ("Underpayment"), in each case, consistent with the calculations required to be made under Section 11(a)(1) hereof. In the event that the Employee, based upon the assertion by the Internal Revenue Service against the Employee of a deficiency which the Employee believes has a high probability of success, determines that an Overpayment has been made, any such Overpayment paid or distributed by the Bank to or for the benefit of Employee shall be treated for all purposes as a loan ab initio which the Employee shall repay to the Bank together with interest at the applicable federal rate provided for in Section 7872(f)(2)(B) of the Code; provided, however, that no such loan shall be deemed to have been made and no amount shall be payable by the Employee to the Bank if and to the extent such deemed loan and payment would not either reduce the amount on which the Employee is subject to tax under Section 1 and Section 4999 of the Code or generate a refund of such taxes. In the event that the Employee and the Bank determine, based upon controlling precedent or other substantial authority, that an Underpayment has occurred, any such Underpayment shall be promptly paid by the Bank to or for the benefit of the Employee together with interest at the applicable federal rate provided for in Section 7872(f)(2)(B) of the Code. (4) A "Change in Control" shall be deemed to have occurred if: (i) as a result of, or in connection with, any public offering, tender offer or exchange offer, merger or other business combination, sale of assets or contested election, any combination of the foregoing transactions, or any similar transaction, the persons who were non-employee directors of the Bank or a holding company controlling the Bank before such transaction cease to constitute a majority of the Board of Directors of the Bank or such holding company or any successor thereof; (ii) the Bank or a holding company controlling the Bank transfers substantially all of its assets to another corporation which is not a wholly owned subsidiary of the Bank or such holding company; (iii) the Bank or a holding company controlling the Bank sells substantially all of the assets of a subsidiary or affiliate which, at the time of such sale, is the principal employer of the Employee; or (iv) the Bank or a holding company controlling the Bank is merged or consolidated with another corporation and, as a result of the merger or consolidation, less than fifty one percent (51%) of the outstanding voting securities of the surviving or resulting corporation is owned in the aggregate by the former stockholders of the Bank or of such holding company controlling the Bank. Notwithstanding the foregoing, but only to the extent required under federal banking law, the amount payable under Subsection(a) of this Section 11 shall be reduced to the extent that on the date of the Employee's termination of employment, the amount payable under Subsection(a) of this Section 11 exceeds the limitation on severance benefits that is set forth in Regulatory Bulletin 27a of the Office of Thrift Supervision, as in effect on the Effective Date. (b) Change in Control; Voluntary Termination: Notwithstanding any other provision of this Agreement to the contrary, but subject to Section 11(a)(2) hereof, the Employee may voluntarily terminate his employment under this Agreement within twelve (12) months following a Change in Control of the Bank, as defined in paragraph (a)(4) of this Section 11, and the Employee shall thereupon be entitled to receive the payment described in Section 11(a)(1) of this Agreement, within ninety (90) days following the occurrence of any of the following events, which has not been consented to in advance by the Employee in writing; (i) the requirement that the Employee perform his principal executive functions more than thirty (30) miles from his primary office as of the date of the Change in Control; (ii) a material reduction in the Employee's base compensation as in effect on the date of the Change in Control or as the same may be changed by mutual agreement from time to time, unless part of an institution-wide reduction; (iii) the failure by the Bank to continue to provide the Employee with compensation and benefits provided for under this Agreement, as the same may be increased from time to time, or with benefits substantially similar to those provided to him under any employee benefit in which the Employee is a participant at the time of the Change in Control, or the taking of any action which would materially reduce any of such benefits or deprive the Employee of any material fringe benefit enjoyed by him at the time of the Change in Control, unless part of an institution-wide reduction; (iv) the assignment to the Employee of duties and responsibilities materially different from those normally associated with his position as referenced at Section 1; (v) a failure to elect or re-elect the Employee to the Board of Directors of the Bank, if the Employee is serving on the Board on the date of the Change in Control; or (vi) a material diminution or reduction in the Employee's responsibilities or authority (including reporting responsibilities) in connection with his employment with the Bank. (c) Compliance with 12 U.S.C. Section 1828(k): Any payments made to the Employee pursuant to this Agreement, or otherwise, are subject to and conditioned upon their compliance with 12 U.S.C. Section 1828(k) and any regulations promulgated thereunder. (d) Trust: (1) Within five business days before or after a Change in Control as defined in Section 11(a) of this Agreement which was not approved in advance by a resolution of a majority of the Continuing Directors of the Bank, the Bank shall (i) deposit, or cause to be deposited, in a grantor trust (the "Trust"), designed to conform with Revenue Procedure 93-64 (or any successor) and having a trustee independent of the Bank, an amount equal to 2.99 times the Employee's "base amount" as defined in Section 280G(b)(3) of the Code, and (ii) provide the trustee of the Trust with a written direction to hold said amount and any investment return thereon in a segregated account for the benefit of the Employee, and to follow the procedures set forth in the next paragraph as to the payment of such amounts from the Trust. (2) During the twelve (12) consecutive month period following the date on which the Bank makes the deposit referred to in the preceding paragraph, the Employee may provide the trustee of the Trust with a written notice requesting that the trustee pay to the Employee an amount designated in the notice as being payable pursuant to Section 11(a) or (b). Within three business days after receiving said notice, the trustee of the Trust shall send a copy of the notice to the Bank via overnight and registered mail, return receipt requested. On the tenth (10th) business day after mailing said notice to the association, the trustee of the Trust shall pay the Employee the amount designated therein in immediately available funds, unless prior thereto the Bank provides the trustee with a written notice directing the trustee to withhold such payment. In the latter event, the trustee shall submit the dispute to non-appealable binding arbitration for a determination of the amount payable to the Employee pursuant to Section 11(a) or (b) hereof, and the party responsible for the payment of the costs of such arbitration (which may include any reasonable legal fees and expenses incurred by the Employee) shall be determined by the arbitrator. The trustee shall choose the arbitrator to settle the dispute, and such arbitrator shall be bound by the rules of the American Arbitration Association in making his or her determination. The parties and the trustee shall be bound by the results of the arbitration and, within 3 days of the determination by the arbitrator, the trustee shall pay from the Trust the amounts required to be paid to the Employee and/or the Bank, and in no event shall the trustee be liable to either party for making the payments as determined by the arbitrator. (3) Upon the earlier of (i) any payment from the Trust to the Employee, or (ii) the date twelve (12) months after the date on which the Bank makes the deposit referred to in the first paragraph of this subsection (d)(1), the trustee of the Trust shall pay to the Bank the entire balance remaining in the segregated account maintained for the benefit of the Employee. The Employee shall thereafter have no further interest in the Trust pursuant to this Agreement. (e) In the event that any dispute arises between the Employee and the Bank as to the terms or interpretation of this Agreement, including this Section 11, whether instituted by formal legal proceedings or otherwise, including any action that the Employee takes to enforce the terms of this Section 11 or to defend against any action taken by the Bank, the Employee shall be reimbursed for all costs and expenses, including reasonable attorneys' fees, arising from such dispute, proceedings or actions, provided that the Employee shall obtain a final judgment by a court of competent jurisdiction in favor of the Employee. Such reimbursement shall be paid within ten (10) days of Employee's furnishing to the Bank written evidence, which may be in the form, among other things, of a canceled check or receipt, of any costs or expenses incurred by the Employee. Should the Employee fail to obtain a final judgment in favor of the Employee and a final judgment is entered in favor of the Bank, then the Bank shall be reimbursed for all costs and expenses, including reasonable Attorneys' fees arising from such dispute, proceedings or actions. Such reimbursement shall be paid within ten (10) days of the Bank furnishing to the Employee written evidence, which may be in the form, among other things, of a canceled check or receipt, of any costs or expenses incurred by the Bank. 12. Employer will permit Employee or his personal representative(s) or heirs, during a period of three months following Employee's termination of employment by Employer for the reasons set forth in Subsections 9(d) or 11(a), if such termination follows a Change of Control, to require Employer, upon written request, to purchase all outstanding stock options previously granted to Employee under any stock option plan then in effect to the extent the options are vested at a cash purchase price equal to the amount by which the aggregate "fair market value" of the shares subject to such options exceeds the aggregate option price for such shares. For purposes of this Agreement, the term "fair market value" shall mean the higher of (1) the average of the highest asked prices for shares in the over-the-counter market as reported on the NASDAQ system or other exchange if the shares are traded on such system for the 30 business days preceding such termination, or (2) the average per share price actually paid for the most highly priced 1% of the shares acquired in connection with the Change of Control by any person or group acquiring such control. 13. Federal Income Tax Withholding: The Bank may withhold all federal and state income or other taxes from any benefit payable under this Agreement as shall be required pursuant to any law or government regulation or ruling. 14. Successors and Assigns: (a) Bank. This Agreement shall not be assignable by the Bank, provided that this Agreement shall inure to the benefit of and be binding upon any corporate or other successor of the Bank which shall acquire, directly or indirectly, by merger, consolidation, purchase or otherwise, all or substantially all of the assets or stock of the Bank. (b) Employee. Since the Bank is contracting for the unique and personal skills of the Employee, the Employee shall be precluded from assigning or delegating his rights or duties hereunder without first obtaining the written consent of the Bank; provided, however, that nothing in this paragraph shall preclude (i) the Employee from designating a beneficiary to receive any benefit payable hereunder upon his death, or (ii) the executors, administrators, or other legal representatives of the Employee or his estate from assigning any rights hereunder to the person or persons entitled thereunto. (c) Attachment. Except as required by law, no right to receive payments under this Agreement shall be subject to anticipation, commutation, alienation, sale, assignment, encumbrance, charge, pledge, or hypothecation or to exclusion, attachment, levy or similar process or assignment by operation of law, and any attempt, voluntary or involuntary, to effect any such action shall be null, void and of no effect. 15. Amendments. No amendments or additions to this Agreement shall be binding unless made in writing and signed by all of the parties, except as herein otherwise specifically provided. 16. Applicable Law. Except to the extent preempted by federal law, the laws of the State of Indiana shall govern this Agreement in all respects, whether as to its validity, construction, capacity, performance or otherwise. 17. Severability. The provisions of this Agreement shall be deemed severable and the invalidity or unenforceability of any provision shall not affect the validity or enforceability of the other provisions hereof. 18. Entire Agreement. This Agreement, together with any understanding or modifications thereof as agreed to in writing by the parties, shall constitute the entire agreement between the parties hereto and supersedes any other agreement between the parties hereto relating to the employment of the Employee IN WITNESS WHEREOF, the parties have executed this Agreement on the day and year first hereinabove written. ATTEST: RIVER VALLEY FINANCIAL BANK /s/ Lonnie D. Collins By: /s/ Fred W. Koehler - ---------------------------------- -------------------------------------- Lonnie D. Collins, Secretary Fred W. Koehler, Chairman of the Board /s/ Matthew P. Forrester -------------------------------------- Matthew P. Forrester The undersigned, River Valley Bancorp, sole shareholder of Bank, agrees that if it shall be determined for any reason that any obligation on the part of Bank to continue to make any payments due under this Agreement to Employee is unenforceable for any reason, River Valley Bancorp agrees to honor the terms of this Agreement and continue to make any such payments due hereunder to Employee or to satisfy any such obligation pursuant to the terms of this Agreement, as though it were the Bank hereunder. RIVER VALLEY BANCORP By: /s/ Fred W. Koehler ------------------------------------- Fred W. Koehler, Chairman EX-13 3 SHAREHOLDER ANNUAL REPORT River Valley Bancorp P.O. Box 1590 Madison, Indiana 47250-0590 (812) 273-4949 Fax - (812) 273-2883 To Our Shareholders, Customers, and Friends: It is my pleasure to present to you River Valley Bancorp's fourth Annual Report to Shareholders covering the year ending December 31, 1999. The world was enamored in 1999 as we waited, watched and anticipated change associated with the passing of a century. In 1999, the impetus for change at River Valley Bancorp came from new management and management philosophy. Many will regard the passing of a century as a defining moment in time; history too will decide if 1999 was a redefining moment in the life of this organization. While our Corporation has its origins dating back nearly 125 years, we are very mindful that our commitment to the future, not the past, will define our successes in this new century. We are very proud of our heritage, but are confident that we are using our past as an agent for change rather than a focus for the future. If 1999 is a defining moment for the future, it also marked the culmination of an evolution in merging the cultures of two former banking organizations into one. River Valley Bancorp reflects the strengths of what had been two distinct entities. Today the organization is recognized in our communities as the only locally owned and controlled bank. The Bank has developed a service promise...Expect A Difference!..that reinforces our organization's commitment to customer service and community involvement. Our employees are dedicated to the premise that service is much more than a slogan, it's a commitment that stands the test of time. Operationally 1999 was a year of transitions as well, as net earnings for 1999 totaled $1,039,000, or basic earnings per share of $1.03, compared to $1,253,000, or $1.13 basic earnings per share, reported in 1998. Current year earnings were negatively impacted by decreased secondary market activity which resulted in $74,000 in gains on sale of loans, compared to $339,000 in gains recorded in 1998. The current year reflects a modest decrease in total operating expenses while including a $150,000 pre-tax expense associated with a severance agreement. During the fourth quarter of 1999, management implemented a comprehensive plan to control operating expenses. During 1999, and primarily in the last six months of the year, the Corporation aggressively repurchased shares to be held as treasury shares. For the period ended December 31, 1999, we repurchased a total of 202,943 shares for a total of $2.7 million, or an average price of $13.42. The current book value of outstanding shares as of December 31, 1999 was $17.33 compared to $15.86 as of December 31, 1998. The Board of Directors declared dividends totaling $0.265 per share during the year, an increase from the $0.22 recorded the year prior. Additionally, during 1999, your Corporation diligently worked on nonperforming assets. As of December 31, 1999, nonperforming assets totaled $857,000, or 0.62% of total assets compared to $1.9 million, or 1.47% of total assets from the prior year-end. The Corporation was able to reduce its nonperforming assets without significantly raising its loan losses. Net losses for fiscal 1999 totaled $95,000 as compared to $74,000 in fiscal 1998. As a result of improving trends and collection efforts, the Corporation was able to lower its provision for losses on loans from $275,000 in fiscal 1998 to $140,000 in 1999. While 1999 was a year marked by transitions and changes, we believe that these changes have laid the foundation for significant improvements in the years to come. Respectfully, /s/ Matthew P. Forrester Matthew P. Forrester President, CEO River Valley Bancorp BUSINESS OF RIVER VALLEY River Valley Bancorp ("River Valley" or the "Corporation"), an Indiana corporation, was formed in 1996 for the primary purpose of purchasing all of the issued and outstanding common stock of River Valley Financial Bank ("River Valley Financial" or the "Bank") in its conversion from mutual to stock form. The conversion offering culminated with the sale of 1,190,250 common shares at an initial offering price of $10.00 per share. In 1996, the Corporation utilized approximately $3.0 million of the net conversion proceeds to purchase 95.6% of the outstanding common shares of Citizens National Bank of Madison ("Citizens") in a transaction that was accounted for using the purchase method of accounting. River Valley Financial and Citizens merged in 1997. Future references to River Valley, River Valley Financial and Citizens are utilized herein, as the context requires. The activities of River Valley have been limited primarily to holding the stock of the Bank. River Valley Financial was organized in 1875 under the laws of the United States of America. River Valley Financial conducts operations from its five full-service office locations in Jefferson County and offers a variety of deposit and lending services to consumer and commercial customers in Jefferson and surrounding counties. The Corporation is subject to regulation, supervision and examination by the Office of Thrift Supervision of the U.S. Department of Treasury (the "OTS"). River Valley Financial is subject to regulation, supervision and examination by the OTS and the Federal Deposit Insurance Corporation (the "FDIC"). Deposits in River Valley Financial are insured up to applicable limits by the Savings Association Insurance Fund ("SAIF") of the FDIC. MARKET PRICE OF THE CORPORATION'S COMMON SHARES AND RELATED SHAREHOLDER MATTERS There were 921,972 common shares of River Valley Bancorp outstanding at February 21, 2000, held of record by 402 shareholders. The number of shareholders does not reflect the number of persons or entities who may hold stock in nominee or "street name." The Corporation's common shares are listed on The Nasdaq SmallCap Market ("Nasdaq"), under the symbol "RIVR". Presented below are the high and low sale prices for the Corporation's common shares, as well as cash distributions paid thereon for each quarter of 1999, 1998 and 1997. Such sales prices do not include retail financial markups, markdowns or commissions. Information relating to sales prices has been obtained from Nasdaq. MARKET PRICE OF THE CORPORATION'S COMMON SHARES AND RELATED SHAREHOLDER MATTERS (CONTINUED) Quarter Ended High Low Cash Distributions (1) 1999 December 31, 1999 $12.63 $11.50 $0.075 September 30, 1999 14.38 13.00 0.065 June 30, 1999 14.75 12.25 0.065 March 31, 1999 15.75 13.13 0.060 1998 December 31, 1998 $16.00 $13.25 $0.060 September 30, 1998 19.00 13.75 0.055 June 30, 1998 20.75 18.38 0.055 March 31, 1998 19.75 18.50 0.050 1997 December 31, 1997 $19.00 $16.25 $0.050 September 30, 1997 17.25 14.75 0.040 June 30, 1997 15.00 13.63 0.040 March 31, 1997 15.50 13.00 - (1) River Valley Financial had filed a request with the Internal Revenue Service ("IRS") in 1995 to deconsolidate the Bank's subsidiaries in future federal income tax return filings. In August 1998, the Corporation finalized a closing agreement with the IRS that enabled the Corporation and each of its subsidiaries to file separate returns. By definition, the 1998 and 1997 cash distributions have been deemed a tax-free return of capital. The high and low sales prices for River Valley's common shares between December 31, 1999 and February 21, 2000 were $12.63 and $12.00, respectively. Under OTS regulations applicable to converted savings associations, River Valley Financial is not permitted to pay a cash dividend on its common shares if the regulatory capital of River Valley Financial would, as a result of the payment of such dividend, be reduced below the amount required for the liquidation account (which was established for the purpose of granting a limited priority claim on the assets of River Valley Financial, in the event of a complete liquidation, to those members of River Valley Financial before the Conversion who maintain a savings account at River Valley Financial after the Conversion) or applicable regulatory capital requirements prescribed by the OTS. Regulations of the OTS impose limitations on the payment of dividends and other capital distributions by savings associations. The OTS amended its capital distribution regulation in a final rule which became effective on April 1, 1999. Because the Bank is a subsidiary of a savings and loan holding company, it is required to file a notice with the OTS 30 days before making any capital distributions to the Holding Company. It may also have to file an application for approval of a proposed capital distribution with the OTS if the Bank is not eligible for expedited treatment under the OTS's application processing rules, or the total amount of all capital distributions, including the proposed capital distribution, for the applicable calendar year would exceed an amount equal to the Bank's net earnings for that year to date plus the Bank's retained net earnings for the preceding two years. The Bank must also file an application for approval of a proposed capital distribution if, following the proposed distribution, the Bank would not be at least adequately capitalized under the OTS prompt corrective action regulations, or if the proposed distribution would violate a prohibition contained in any applicable statute, regulation, or agreement between the OTS or the FDIC. SELECTED CONSOLIDATED FINANCIAL INFORMATION AND OTHER DATA The following tables set forth certain information concerning the consolidated financial condition, earnings, and other data regarding River Valley at the dates and for the periods indicated. All financial information prior to 1996 relates to River Valley Financial as a mutual savings association.
Selected consolidated financial condition data: (1) At December 31, 1999 1998 1997 1996 1995 Total amount of: (In thousands) Assets $138,695 $138,369 $136,933 $145,541 $86,604 Loans receivable - net (2) 115,131 112,385 111,887 108,994 57,945 Cash and cash equivalents (3) 8,052 12,307 5,765 8,785 2,689 Mortgage-backed and related securities (4) 4,209 5,986 8,978 12,846 9,917 Investment securities (4) 5,230 1,283 4,272 8,948 13,018 Deposits 114,251 118,151 114,955 125,656 75,233 FHLB advances and other borrowings 6,500 270 2,000 1,100 4,471 Shareholders' equity- net (5) 16,866 18,613 17,989 16,805 6,574 Summary of consolidated earnings data: (1) Year ended December 31, 1999 1998 1997 1996 1995 (In thousands, except share data) Total interest income $9,734 $10,108 $10,362 $ 5,875 $ 5,794 Total interest expense 4,617 4,842 5,049 3,412 3,594 ----- ------- ------- --------- ------- Net interest income 5,117 5,266 5,313 2,463 2,200 Provision for losses on loans 140 275 304 22 150 ------ -------- -------- ----------- -------- Net interest income after provision for losses on loans 4,977 4,991 5,009 2,441 2,050 Other income 844 1,188 1,134 578 362 General, administrative and other expense 4,080 4,093 4,003 2,870 1,966 ----- ------- --------- --------- ------- Earnings before income tax expense 1,741 2,086 2,140 149 446 Income tax expense 702 833 830 76 188 ------ -------- -------- ----------- -------- Net earnings $1,039 $ 1,253 $ 1,310 $ 73 $ 258 ===== ======= ======= =========== ======== Basic earnings per share (6) $1.03 $1.13 $1.20 N/A N/A ==== ==== ==== === === Diluted earnings per share (6) $1.03 $1.12 $1.18 N/A N/A ==== ==== ==== === ===
(1) River Valley acquired Citizens National Bank as of December 20, 1996. The acquisition was accounted for using the purchase method of accounting and, therefore, the 1996 financial statements reflect only eleven days of activity with respect to the acquisition. (2) Includes loans held for sale. (3) Includes certificates of deposit in other financial institutions. (4) Includes securities designated as available for sale. (5) Consists solely of retained earnings at December 31, 1995. (6) Earnings per share is not applicable for the years ended December 31, 1996 and 1995 as River Valley converted to stock form in 1996. SELECTED CONSOLIDATED FINANCIAL INFORMATION AND OTHER DATA (CONTINUED) Selected financial ratios and other data:
Year ended December 31, 1999 1998 1997 1996 1995 Interest rate spread during period 3.63% 3.66% 3.64% 2.79% 2.36% Net yield on interest-earning assets (1) 3.94 4.08 4.00 2.98 2.61 Return on assets (2) 0.76 0.92 0.99 0.08 0.30 Return on equity (3) 5.87 6.85 7.53 1.05 4.01 Equity to assets (4) 12.16 13.45 13.12 11.55 7.59 Average interest-earning assets to average interest-bearing liabilities 108.81 111.07 109.56 104.64 105.62 Nonperforming assets to total assets (4) 0.62 1.47 0.58 0.56 0.01 Allowance for loan losses to total loans outstanding (4) 1.28 1.33 1.13 1.06 0.70 Allowance for loan losses to nonperforming loans (4) 164.41 75.78 177.72 145.30 5,087.50 Net charge-offs to average total loans outstanding 0.08 0.06 0.20 0.01 0.01 General, administrative and other expense to average assets (5) (6) 2.97 3.01 2.83 3.33 2.26 Dividends as percent of net earnings 26.66 20.33 11.83 N/A N/A Numbers of full service offices 5 5 6 6 3
(1) Net interest income divided by average interest-earning assets. (2) Net earnings divided by average total assets. (3) Net earnings divided by average total equity. (4) At end of period. (5) General, administrative and other expense divided by average total assets. (6) Includes a $503,000 charge (or .94% of weighted-average assets) in 1996 related to the SAIF recapitalization assessment. River Valley Bancorp MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS General As discussed previously, River Valley was incorporated for the primary purpose of owning all of the outstanding shares of River Valley Financial. As a result, the discussion that follows focuses on River Valley Financial's financial condition and results of operations for the periods presented. The following discussion and analysis of the financial condition as of December 31, 1999 and River Valley's results of operations for periods prior to that date should be read in conjunction with the consolidated financial statements and the notes thereto, included elsewhere in this Annual Report. In addition to the historical information contained herein, the following discussion contains forward-looking statements that involve risks and uncertainties. River Valley's operations and River Valley's actual results could differ significantly from those discussed in the forward-looking statements. Some of the factors that could cause or contribute to such differences are discussed herein but also include, but are not limited to, changes in the economy and interest rates in the nation and River Valley's general market area. The forward-looking statements contained herein include those with respect to the following matters: 1. Management's determination as to the amount and adequacy of the loan loss allowance; 2. The effect of changes in interest rates on financial condition and results of operations; 3. Management's opinion as to the effect of recent accounting pronouncements on River Valley's consolidated financial position and results of operations. Discussion of Changes in Financial Condition from December 31, 1998 to December 31, 1999 At December 31, 1999, River Valley's consolidated assets totaled $138.7 million, representing an increase of $326,000, or .2%, over the December 31, 1998 total. The modest increase in assets was funded primarily by a $6.2 million increase in borrowings. Deposits decreased by $3.9 million from $118.2 million as of December 31, 1998, to $114.3 million as of December 31, 1999. Shareholders' equity totaled $16.9 million at December 31, 1999, a net decrease of $1.7 million from the $18.6 million total as of December 31, 1998. The decrease in equity was attributed primarily to the repurchase of approximately $2.7 million, or 202,943 shares of common stock held as treasury shares. Liquid assets (i.e., cash, federal funds sold, interest-earning deposits and certificates of deposit) decreased by $4.2 million from December 31, 1998 levels, to a total of $8.1 million at December 31, 1999. Investment securities totaled $5.2 million at December 31, 1999, an increase of $3.9 million over December 31, 1998 levels. The increase was due to purchases of investment securities totaling $21.5 million during 1999, which were partially offset by maturities of $17.7 million. Mortgage-backed securities decreased by $1.8 million, or 29.7%, to a total of $4.2 million at December 31, 1999, primarily due to principal repayments. River Valley Bancorp MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Discussion of Changes in Financial Condition from December 31, 1998 to December 31, 1999 (continued) Loans receivable, including loans held for sale, totaled $115.1 million at December 31, 1999, an increase of $2.7 million, or 2.4%, over the $112.4 million total at December 31, 1998. The increase resulted primarily from loan originations during 1999 of $56.9 million, which were partially offset by principal repayments of $39.6 million and sales of $14.2 million. Growth in the loan portfolio was comprised primarily of a $7.4 million, or 11.9%, increase in loans secured by one-to-four family residential real estate and an $8.9 million, or 64.2%, increase in loans secured by nonresidential real estate, while commercial and consumer loans declined by $2.7 million and $3.1 million, respectively, year to year. Loan origination volume for 1998 exceeded that of 1999 by $12.7 million, or 18.2%. The volume of loan sales into the secondary mortgage market decreased during 1999 by $3.0 million, or 17.3%, from 1998 volume. River Valley's consolidated allowance for loan losses totaled approximately $1.5 million at both December 31, 1999 and 1998, which represented 1.28% and 1.33%, respectively, of total loans at those dates. Nonperforming loans (defined as loans delinquent greater than 90 days and loans on nonaccrual status) totaled $857,000 and $1.9 million at December 31, 1999 and 1998, respectively. The consolidated allowance for loan losses represented 178% and 76% of nonperforming loans at December 31, 1999 and 1998, respectively. Although management believes that its allowance for loan losses at December 31, 1999 was adequate based upon the available facts and circumstances, there can be no assurance that additions to such allowance will not be necessary in future periods, which could negatively affect the Corporation's results of operations. Deposits decreased by $3.9 million, or 3.3%, to a total of $114.3 million at December 31, 1999, compared to the $118.2 million total at December 31, 1998. Savings and demand deposits increased by $3.6 million, or 6.9%, during 1999, while certificates of deposit decreased by $7.5 million, or 11.4%. These fluctuations in balances were attributed to management's efforts to lower its funding costs for deposits. Advances from the Federal Home Loan Bank and other borrowed money increased by $6.2 million from the total at December 31, 1998, as current period borrowings of $9.1 million were partially offset by repayments of $2.9 million. Proceeds from advances were used to fund net deposit outflows and loan originations. Shareholders' equity totaled $16.9 million at December 31, 1999, a decrease of $1.7 million, or 9.1%, from the $18.6 million total at December 31, 1998. The decrease resulted primarily from repurchases of shares totaling $2.7 million and cash dividends of $277,000, which were partially offset by net earnings of $1.04 million and a net increase in shares for stock benefit plans of $232,000. River Valley Bancorp MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Comparison of Results of Operations for the Years Ended December 31, 1999 and 1998 General River Valley's net earnings for the year ended December 31, 1999 totaled $1.04 million, a decrease of $214,000, or 17.1%, from net earnings reported in 1998. The decrease in net earnings in the 1999 period was primarily attributable to a decrease in net interest income of $149,000 and a decrease of $344,000 in other income, including a decrease of $265,000 in the gain on sale of loans year to year. General, administrative and other expense for the year was marginally lower, but included $150,000 in non-recurring expenses associated with severance agreements. The provision for federal income taxes decreased by $131,000 in 1999 as compared to the same period in 1998. The provision for loan losses in 1999 was $140,000 as compared to $275,000 in 1998. Net Interest Income Total interest income for the year ended December 31, 1999, amounted to $9.7 million, a decrease of $374,000, or 3.7%, from the 1998 total, reflecting the effects of a lower yield on average assets. While the average balance of average interest-earning assets outstanding year-to-year increased by $823,000, the yield on those assets decreased from an average yield of 7.82% in 1998 to 7.49% in 1999. Interest income on loans and mortgage-backed securities totaled $9.0 million for 1999, a decrease of approximately $684,000, or 7.0%, from 1998. Interest income on investments and interest-earning deposits increased by $310,000, or 80.9%, due to an increase in the average balance outstanding of $6.0 million associated with a modest decrease in the average yield of approximately 4 basis points from the comparable 1998 period. Interest expense on deposits decreased by $208,000, or 4.4%, to a total of $4.5 million for the year ended December 31, 1999, due primarily to a 30 basis point decrease in the weighted average cost of deposits. The cost of deposits fell from 4.12% in 1998 to 3.82% in 1999. Interest expense on borrowings totaled $143,000 for the year ended December 31, 1999, a decrease of $17,000, or 10.6%, from 1998. The decrease resulted primarily from lower average borrowings year-to-year, partially offset by a 15 basis point increase in average cost. As a result of the foregoing changes in interest income and interest expense, net interest income decreased during 1999 by $149,000, or 2.8%, compared to 1998. The interest rate spread decreased by three basis points for 1999 to 3.63% from 3.66% in the 1998 period, while the net interest margin amounted to 3.94% in 1999 and 4.08% in 1998. Provision for Losses on Loans A provision for losses on loans is charged to earnings to bring the total allowance for loan losses to a level considered appropriate by management based upon historical experience, the volume and type of lending conducted by River Valley Financial, the status of past due principal and interest payments, general economic conditions, particularly as such conditions relate to the primary market area, and other factors related to the collectibility of the loan portfolio. As a result of such analysis, management recorded a $140,000 provision for losses on loans in 1999, a decrease of $135,000, or 49.1%, compared to the $275,000 provision recorded in 1998. The current period provision generally reflects growth in the loan portfolio, coupled with a decrease in the level of nonperforming loans year-to-year. Nonperforming loans for the period ended December 31, 1999, were $857,000, a reduction of approximately $1.0 million from the $1.9 million at December 31, 1998. Net charge-offs amounted to $95,000 in 1999, compared to $74,000 in 1998. While management believes that the allowance for losses on loans is adequate at December 31, 1999, based upon available facts and circumstances, there can be no assurance that the loan loss allowance will be adequate to cover losses on nonperforming assets in the future. River Valley Bancorp MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Comparison of Results of Operations for the Years Ended December 31, 1999 and 1998 (continued) Other Income Other income amounted to $844,000 for the year ended December 31, 1999, a decrease of $344,000, or 29.0%, compared to 1998, due primarily to a $265,000, or 78.2%, decrease in gain on sale of loans and a $33,000 decrease in service fees, charges and other operating income. General, Administrative and Other Expense General, administrative and other expense totaled $4.1 million for the year ended December 31, 1999, a decrease of $13,000, or .3%, from the 1998 total. Employee compensation and benefits decreased by $147,000, or 6.4%, in 1999 as compared to 1998, primarily from the effects of a decrease in the Corporation's stock price used to record expense for various stock compensation programs coupled with a decrease in staffing levels. The current year's compensation expense included $150,000 in non-recurring charges associated with a severance agreement in a managerial restructuring completed in the third quarter of fiscal 1999. Occupancy and equipment expense increased by $80,000, or 16.5%, in 1999, primarily from charges associated with equipment upgrades and expenses associated with Year 2000 compliance. Other operating expenses increased by $76,000, or 6.9%, due primarily to increases in advertising, office supplies and educational expenses of staff. Income Taxes The provision for income taxes decreased by $131,000, or 15.7%, for the year ended December 31, 1999, as compared to 1998. The decrease was due primarily to a decrease in pretax earnings of $345,000, or 16.5%. The effective tax rates were 40.3% and 39.9% for the years ended December 31, 1999 and 1998, respectively. Comparison of Results of Operations for the Years Ended December 31, 1998 and 1997 General River Valley's net earnings for the year ended December 31, 1998, totaled $1.3 million, a decrease of $57,000, or 4.4%, from net earnings reported in 1997. The decrease in net earnings in the 1998 period was primarily attributable to a decrease in net interest income of $47,000, an increase in general, administrative and other expense of $90,000 and an increase in the provision for federal income taxes of $3,000, which were partially offset by a decrease in the provision for losses on loans of $29,000 and an increase in other income of $54,000. River Valley Bancorp MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Comparison of Results of Operations for the Years Ended December 31, 1998 and 1997 (continued) Net Interest Income Total interest income for the year ended December 31, 1998, amounted to $10.1 million, a decrease of $254,000, or 2.5%, from the 1997 total, reflecting the effects of a $3.5 million, or 2.6%, decline in the balance of average interest-earning assets outstanding year-to-year. Interest income on loans and mortgage-backed securities totaled $9.7 million for 1998, a decrease of $38,000, or .4%, from 1997. The decrease resulted primarily from a $315,000, or .3%, decrease in the average balance of loans and mortgage-backed securities outstanding year-to-year, coupled with a one basis point decrease in yield to 7.97% in 1998. Interest income on investments and interest-earning deposits decreased by $216,000, or 36.1%, due to a decrease in the average balance outstanding of $3.2 million, coupled with an approximate 45 basis point decrease in yield from the comparable 1997 period. Interest expense on deposits decreased by $232,000, or 4.7%, to a total of $4.7 million for the year ended December 31, 1998, due primarily to a $5.1 million decrease in the average balance of deposits outstanding, coupled with a one basis point decline in the weighted-average cost of deposits to 4.12% in 1998. Interest expense on borrowings totaled $160,000 for the year ended December 31, 1998, an increase of $25,000, or 18.5%, over 1997. The increase resulted primarily from an increase in average borrowings outstanding year-to-year, coupled with an increase in average cost. As a result of the foregoing changes in interest income and interest expense, net interest income decreased during 1998 by $47,000, or .9%, compared to 1997. The interest rate spread increased by two basis points for 1998, to 3.66% from 3.64% in the 1997 period, while the net interest margin amounted to 4.08% in 1998 and 4.00% in 1997. Provision for Losses on Loans A provision for losses on loans is charged to earnings to bring the total allowance for loan losses to a level considered appropriate by management based upon historical experience, the volume and type of lending conducted by River Valley Financial, the status of past due principal and interest payments, general economic conditions, particularly as such conditions relate to the primary market area, and other factors related to the collectibility of the loan portfolio. As a result of such analysis, management recorded a $275,000 provision for losses on loans in 1998, a decrease of $29,000, or 9.5%, compared to the $304,000 provision recorded in 1997. The current period provision generally reflects growth in the loan portfolio, coupled with an increase in the level of nonperforming loans year-to-year. Net charge-offs amounted to $74,000 in 1998, compared to $218,000 in 1997. River Valley Bancorp MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Comparison of Results of Operations for the Years Ended December 31, 1998 and 1997 (continued) Other Income Other income amounted to $1.2 million for the year ended December 31, 1998, an increase of $54,000, or 4.8%, compared to 1997, due primarily to a $212,000, or 166.9%, increase in gain on sale of loans and a $57,000 gain on sale of office premises and equipment, which were partially offset by a nonrecurring gain on sale of branch office and related deposits in 1997 totaling $206,000. The 1997 gain on sale of office premises resulted from River Valley Financial's sale of the Hanover branch facility, which was consummated in accordance with the terms of regulatory approval of the Citizens acquisition. General, Administrative and Other Expense General, administrative and other expense totaled $4.1 million for the year ended December 31, 1998, an increase of $90,000, or 2.2%, over the 1997 total. This increase resulted primarily from a $144,000, or 6.7%, increase in employee compensation and benefits, and a $94,000, or 9.3%, increase in other operating expense, which were partially offset by a $43,000, or 8.2%, decrease in occupancy and equipment expense and a $97,000, or 43.3%, decrease in data processing. The increase in employee compensation and benefits resulted primarily from normal merit increases coupled with an increase in staffing levels year to year. The increase in other operating expense resulted from increases in advertising, office supplies and pro-rata increases in operating expenses due to the Corporation's overall growth year-to-year. The decline in occupancy and equipment resulted from reduced costs following the sale of the Hanover branch location in 1997. The decrease in data processing was due to the conversion to the in-house data processing system used by Citizens after the merger in November 1997. Income Taxes The provision for income taxes increased by $3,000, or .4%, for the year ended December 31, 1998, as compared to 1997. The effective tax rates were 39.9% and 38.8% for the years ended December 31, 1998 and 1997, respectively. AVERAGE BALANCE, YIELD, RATE AND VOLUME DATA The following table presents certain information relating to River Valley's average balance sheet and reflects the average yield on interest-earning assets and the average cost of interest-bearing liabilities for the periods indicated. Such yields and costs are derived by dividing annual income or expense by the average monthly balance of interest-earning assets or interest-bearing liabilities, respectively, for the years presented. Average balances are derived from month-end balances, which include nonaccruing loans in the loan portfolio.
Year ended December 31, 1999 1998 1997 Average Interest Average Interest Average Interest outstanding earned/ Yield/ outstanding earned/ Yield/ outstanding earned/ Yield/ balance paid rate balance paid rate balance paid rate (Dollars in thousands) Interest-earning assets: Interest-earning deposits and other $ 7,821 $ 417 5.34% $ 4,337 $ 233 5.37% $ 5,351 $ 322 6.02% Investment securities (1) 5,347 276 5.17 2,871 150 5.22 5,043 277 5.49 Mortgage-backed and related securities (1) 5,051 301 5.97 7,542 462 6.13 10,874 733 6.74 Loans receivable, net (2) 111,794 8,740 7.82 114,440 9,263 8.09 111,423 9,030 8.10 ------- ----- ---- ------- ------- ------- ------- ------- ------ Total interest-earning assets $130,013 9,735 7.49 $129,190 10,108 7.82 $132,691 10,362 7.81 ======= ======= ======= Interest-bearing liabilities: Deposits $117,258 $4,474 3.82 $113,770 4,682 4.12 $118,872 4,914 4.13 FHLB advances and other borrowings 2,228 143 6.43 2,549 160 6.28 2,244 135 6.02 --------- ------ ---- --------- -------- ------- --------- -------- ------ Total interest-bearing liabilities $119,486 4,617 3.86 $116,319 4,842 4.16 $121,116 5,049 4.17 ======= ----- ---- ======= ------- ------- ======= ------- ------ Net interest income $5,118 $ 5,266 $ 5,313 ====== ======= ======= Interest rate spread (3) 3.63% 3.66% 3.64% ==== ===== ===== Net yield on weighted average 3.94% 4.08% 4.00% interest-earning assets (4) ==== ===== ===== Average interest-earning assets to average 108.81% 111.07% 109.56% ====== ====== ======
(1) Includes securities available for sale at amortized cost prior to SFAS No. 115 adjustments. (2) Total loans less loans in process plus loans held for sale. (3) Interest rate spread is calculated by subtracting weighted average interest rate cost from weighted average interest rate yield for the period indicated. (4) The net yield on weighted average interest-earning assets is calculated by dividing net interest income by weighted average interest-earning assets for the period indicated. River Valley Bancorp MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Rate/Volume Table The following table describes the extent to which changes in interest rates and changes in volume of interest-related assets and liabilities have affected River Valley's interest income and expense during the years indicated. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (i) changes in volume (change in volume multiplied by prior year rate), (ii) changes in rate (change in rate multiplied by prior year volume), and (iii) total changes in rate and volume. The combined effects of changes in both volume and rate, which cannot be separately identified, have been allocated proportionately to the change due to volume and the change due to rate:
Year ended December 31, 1999 vs. 1998 1998 vs. 1997 Increase Increase (decrease) (decrease) due to due to Volume Rate Total Volume Rate Total (In thousands) Interest-earning assets: Interest-earning deposits and other $ 186 $ (2) $ 184 $ (57) $ (32) $ (89) Investment securities 128 (2) 126 (114) (13) (127) Mortgage-backed and related securities (149) (11) (160) (210) (61) (271) Loans receivable, net (211) (312) (523) 244 (11) 233 ---- ----- ----- ---- ----- ---- Total (46) (327) (373) (137) (117) (254) Interest-bearing liabilities: Deposits 151 (359) (208) (210) (22) (232) FHLB advances and other borrowings (21) 4 (17) 19 6 25 ----- ------- ----- ---- ------ ----- Total 130 (355) (225) (191) (16) (207) ----- ---- ---- --- ----- ---- Net change in interest income $ (176) $ 28 $(148) $ 54 $(101) $ (47) ====== ===== ==== ===== ==== =====
Asset and Liability Management Like other financial institutions, River Valley Financial is subject to interest rate risk to the extent that interest-earning assets reprice differently than interest-bearing liabilities. As part of its effort to monitor and manage interest rate risk, River Valley Financial is using the Net Portfolio Value ("NPV") methodology adopted by the OTS as part of its capital regulations. Although River Valley Financial is not subject to the NPV regulation because such regulation does not apply to institutions with less than $300 million in assets and risk-based capital in excess of 12%, the application of the NPV methodology can illustrate River Valley Financial's degree of interest rate risk. The following is an analysis of River Valley Financial's interest rate risk, as of September 30, 1999 (the latest information available) and December 31, 1998, as measured by changes in NPV for an instantaneous and sustained parallel shift of 100 through 400 basis points in market interest rates. River Valley Bancorp MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Asset and Liability Management (continued) As illustrated below, River Valley Financial's NPV is more sensitive to declining rates than rising rates in 1999. Such difference in sensitivity occurs principally due to the Bank's preponderance of adjustable rate mortgage ("ARM") loans in its loan portfolio. Generally, as rates decline, the interest rates on ARM loans will adjust downward. Moreover, the interest River Valley Financial would pay on deposits would decrease because the Bank's deposits generally have shorter periods of repricing. As of September 30, 1999 (Dollars in thousands) Change in Interest Rates Estimated Amount (basis points) NPV of Change Percent +300 $18,220 $(1,741) (9)% +200 19,579 (382) (2) +100 19,943 18 - - 19,961 - - - -100 19,553 (408) (2) - -200 18,801 (1,160) (6) - -300 18,065 (1,896) (9) As of December 31, 1998 (Dollars in thousands) Change in Interest Rates Estimated Amount (basis points) NPV of Change Percent +300 $18,081 $ (405) (2)% +200 18,690 204 (1) +100 18,717 231 (1) - 18,486 - - - -100 17,916 (570) (3) - -200 17,343 (1,143) (6) - -300 17,034 (1,452) (8) River Valley Bancorp MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Asset and Liability Management (continued) As with any method of measuring interest rate risk, certain shortcomings are inherent in the NPV approach. For example, although certain assets and liabilities may have similar maturities or periods of repricing, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. Further, in the event of a change in interest rates, expected rates of prepayment on loans and mortgage-backed securities and early withdrawal levels from certificates of deposit would likely deviate significantly from those assumed in making the risk calculations. Liquidity and Capital Resources The Corporation's principal sources of funds are deposits, loan and mortgage-backed securities repayments, maturities of securities, borrowings and other funds provided by operations. While scheduled loan repayments and maturing investments are relatively predictable, deposit flows and loan and mortgage-backed securities prepayments are more influenced by interest rates, general economic conditions and competition. The Corporation maintains investments in liquid assets based upon management's assessment of (1) the need for funds, (2) expected deposit flows, (3) the yield available on short-term liquid assets and (4) the objectives of the asset/liability management program. OTS regulations presently require River Valley Financial to maintain an average daily balance of cash, investments in United States government and agency securities and other investments in an amount equal to 4% of the sum of River Valley Financial's average daily balance of net withdrawable deposit accounts. The liquidity requirement, which may be changed from time to time by the OTS to reflect changing economic conditions, is intended to provide a source of relatively liquid funds upon which River Valley Financial may rely if necessary to fund deposit withdrawals or other short-term funding needs. At December 31, 1999, River Valley Financial's regulatory liquidity ratio was 28.2%. At such date, River Valley Financial had commitments to originate loans totaling $2.2 million and, in addition, had undisbursed loans in process, unused lines of credit and standby letters of credit totaling $9.6 million. At December 31, 1999, River Valley Financial had no commitments to sell loans and no outstanding commitments to purchase loans. The Corporation considers River Valley Financial's liquidity and capital resources sufficient to meet outstanding short- and long-term needs. At December 31, 1999, the Corporation had no material commitments for capital expenditures. River Valley Bancorp MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Liquidity and Capital Resources (continued) The Corporation's liquidity, primarily represented by cash and cash equivalents, is a result of the funds provided by or used in the Corporation's operating, investing and financing activities. These activities are summarized below for the years ended December 31, 1999, 1998 and 1997:
Year ended December 31, 1999 1998 1997 (In thousands) Cash flows from operating activities $ 5,382 $(1,913) $ 2,395 Cash flows from investing activities: Investment maturities/sales (3,847) 3,000 4,698 Mortgage-backed securities purchases - - (1,350) Mortgage-backed securities repayments 1,709 2,970 3,072 Net loan (originations) repayments (6,673) 2,145 (3,859) Other (157) 731 1,374 Cash flows from financing activities: Net increase (decrease) in deposits (3,900) 3,196 (10,701) Net increase (decrease) in borrowings 6,000 (1,730) 900 Other (2,769) (960) (346) ------- ------- -------- Net increase (decrease) in cash and cash equivalents $(4,255) $ 7,439 $ (3,817) ====== ====== ======
River Valley Financial is required by applicable law and regulation to meet certain minimum capital standards. Such capital standards include a tangible capital requirement, a core capital requirement, or leverage ratio, and a risk-based capital requirement. The tangible capital requirement requires savings associations to maintain "tangible capital" of not less than 1.5% of the association's adjusted total assets. Tangible capital is defined in OTS regulations as core capital minus intangible assets. "Core capital" is comprised of common shareholders' equity (including retained earnings), noncumulative preferred stock and related surplus, minority interests in consolidated subsidiaries, certain nonwithdrawable accounts and pledged deposits of mutual associations. OTS regulations require savings associations to maintain core capital generally equal to 4% of the association's total assets except those associations with the highest examination rating and acceptable levels of risk. River Valley Bancorp MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Liquidity and Capital Resources (continued) OTS regulations require that savings associations maintain "risk-based capital" in an amount not less than 8% of "risk-weighted assets." Risk-based capital is defined as core capital plus certain additional items of capital, which in the case of River Valley Financial includes a general loan loss allowance of $1.4 million at December 31, 1999. River Valley Financial exceeded all of its regulatory capital requirements at December 31, 1999. The following table summarizes River Valley Financial's regulatory capital requirements and regulatory capital at December 31, 1999:
OTS Requirement Actual Amount Percent of Percent of Amount Assets Amount Assets (1) Amount of Excess (Dollars in thousands) Tangible capital 1.5% $2,086 12.1% $16,850 $14,764 Core capital (2) 4.0 5,563 12.1 16,850 11,287 Risk-based capital 8.0 7,615 19.0 18,040 10,425
(1) Tangible and core capital levels are shown as a percentage of total assets; risk-based capital levels are shown as a percentage of risk-weighted assets. (2) The OTS has adopted a core capital requirement for savings associations comparable to that required by the OCC for national banks. The regulation requires core capital of at least 3% of total adjusted assets for savings associations that receive the highest supervisory rating for safety and soundness, and 4% to 5% for all other savings associations. River Valley Financial is in compliance with this requirement. Effect of Recent Accounting Pronouncements In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities," which requires entities to recognize all derivatives in their financial statements as either assets or liabilities measured at fair value. SFAS No. 133 also specifies new methods of accounting for hedging transactions, prescribes the items and transactions that may be hedged, and specifies detailed criteria to be met to qualify for hedge accounting. The definition of a derivative financial instrument is complex, but in general, it is an instrument with one or more underlyings, such as an interest rate or foreign exchange rate, that is applied to a notional amount, such as an amount of currency, to determine the settlement amount(s). It generally requires no significant initial investment and can be settled net or by delivery of an asset that is readily convertible to cash. SFAS No. 133 applies to derivatives embedded in other contracts, unless the underlying of the embedded derivative is clearly and closely related to the host contract. River Valley Bancorp MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Effect of Recent Accounting Pronouncements (continued) SFAS No. 133, as amended by SFAS No. 137, is effective for fiscal years beginning after June 15, 2000. On adoption, entities are permitted to transfer held-to-maturity debt securities to the available-for-sale or trading category without calling into question their intent to hold other debt securities to maturity in the future. SFAS No. 133 is not expected to have a material impact on the Corporation's consolidated financial statements. Year 2000 Compliance Matters As with all providers of financial services, the Bank's operations are heavily dependent on information technology systems. During the three year period leading up to January 1, 2000, the Bank addressed the potential problems associated with the possibility that the computers that control or operate the Bank's information technology system and infrastructure may not have been programmed to read four-digit date codes and, upon arrival of the year 2000, may have recognized the two-digit code "00" as the year 1900, causing systems to fail to function or to generate erroneous data. The Bank's core data processing relative to customer loan and deposit accounts, as well as the general ledger, is performed in-house through use of a purchased software product. Management had been advised, and certain testing had been performed to verify, that the system would continue to function upon arrival of the year 2000. The Bank experienced no technology-related difficulties upon arrival of January 1, 2000, nor was there any interruption of services to its customers. Financial institutions may experience increases in problem loans and credit losses in the event that borrowers failed to prepare properly for Year 2000. Because the Bank's loan portfolio is highly diversified with regard to individual borrowers and types of businesses and the Bank's primary market area is not significantly dependent upon one employer or industry, the Bank does not expect, and to date has not experienced, any significant or prolonged difficulties that will affect net earnings or cash flow. Impact of Inflation and Changing Prices The consolidated financial statements and notes thereto included herein have been prepared in accordance with generally accepted accounting principles, which require River Valley to measure financial position and results of operations in terms of historical dollars with the exception of investment and mortgage-backed securities available-for-sale, which are carried at fair value. Changes in the relative value of money due to inflation or recession are generally not considered. In management's opinion, changes in interest rates affect the financial condition of a financial institution to a far greater degree than changes in the rate of inflation. While interest rates are greatly influenced by changes in the rate of inflation, they do not change at the same rate or in the same magnitude as the rate of inflation. Rather, interest rate volatility is based on changes in the expected rate of inflation, as well as changes in monetary and fiscal policies. Report of Independent Certified Public Accountants Board of Directors River Valley Bancorp We have audited the accompanying consolidated statements of financial condition of River Valley Bancorp as of December 31, 1999 and 1998, and the related consolidated statements of earnings, comprehensive income, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1999. These consolidated financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of River Valley Bancorp as of December 31, 1999 and 1998, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1999, in conformity with generally accepted accounting principles. /s/ Grant Thornton Cincinnati, Ohio February 16, 2000 River Valley Bancorp CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION December 31, (In thousands, except share data)
ASSETS 1999 1998 Cash and due from banks $ 3,648 $ 4,014 Federal funds sold 1,550 825 Interest-earning deposits in other financial institutions 2,854 7,468 -------- --------- Cash and cash equivalents 8,052 12,307 Investment securities designated as available for sale - at market 4,230 283 Investment securities held to maturity - at amortized cost, approximate market value of $995 and $980 as of December 31, 1999 and 1998 1,000 1,000 Mortgage-backed and related securities designated as available for sale - at market 2,071 2,796 Mortgage-backed and related securities held to maturity - at cost, approximate market value of $2,147 and $3,220 as of December 31, 1999 and 1998 2,138 3,190 Loans receivable - net 115,131 108,684 Loans held for sale - at lower of cost or market - 3,701 Real estate acquired through foreclosure - 82 Office premises and equipment - at depreciated cost 1,980 2,023 Federal Home Loan Bank stock - at cost 943 943 Accrued interest receivable on loans 970 987 Accrued interest receivable on mortgage-backed and related securities 26 40 Accrued interest receivable on investments and interest-earning deposits 47 29 Goodwill - net of accumulated amortization 44 50 Cash surrender value of life insurance 854 818 Prepaid expenses and other assets 210 373 Prepaid federal income taxes 359 405 Deferred tax asset 640 658 --------- ---------- Total assets $138,695 $138,369 ======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY 1999 1998 Deposits $114,251 $118,151 Advances from the Federal Home Loan Bank 6,000 - Other borrowed money 500 270 Advances by borrowers for taxes and insurance 36 34 Accrued interest payable 330 468 Other liabilities 641 763 Dividends payable 71 70 ---------- ---------- Total liabilities 121,829 119,756 Commitments - - Shareholders' equity Preferred stock - 2,000,000 shares without par value authorized; no shares issued - - Common stock - 5,000,000 shares without par value authorized; 1,190,250 shares issued - - Additional paid in capital 11,314 11,288 Retained earnings - substantially restricted 9,551 8,789 Shares acquired by stock benefit plans (967) (1,199) Less 219,753 and 16,810 treasury shares - at cost (2,976) (252) Accumulated comprehensive loss, unrealized losses on securities designated as available for sale, net of related tax benefits (56) (13) ---------- ----------- Total shareholders' equity 16,866 18,613 ------- -------- Total liabilities and shareholders' equity $138,695 $138,369 ======= =======
The accompanying notes are an integral part of these statements. River Valley Bancorp CONSOLIDATED STATEMENTS OF EARNINGS Year ended December 31, (In thousands, except share data)
1999 1998 1997 Interest income Loans $8,740 $ 9,263 $ 9,030 Mortgage-backed and related securities 301 462 733 Investment securities 276 150 277 Interest-earning deposits and other 417 233 322 ------ -------- -------- Total interest income 9,734 10,108 10,362 Interest expense Deposits 4,474 4,682 4,914 Borrowings 143 160 135 ------ -------- -------- Total interest expense 4,617 4,842 5,049 ----- ------- ------- Net interest income 5,117 5,266 5,313 Provision for losses on loans 140 275 304 ----- -------- -------- Net interest income after provision for losses on loans 4,977 4,991 5,009 Other income Gain on sale of loans 74 339 127 Gain on sale of Hanover branch and related deposits - - 206 Loss on sale of investment, mortgage-backed and related securities - - (6) Gain on sale of office premises 11 57 - Service fees, charges and other operating 759 792 807 ----- -------- -------- Total other income 844 1,188 1,134 General, administrative and other expense Employee compensation and benefits 2,162 2,309 2,165 Occupancy and equipment 564 484 527 Federal deposit insurance premiums 42 42 50 Amortization of goodwill 6 27 27 Data processing 126 127 224 Other operating 1,180 1,104 1,010 ----- ------- ------- Total general, administrative and other expense 4,080 4,093 4,003 ----- ------- ------- Earnings before income taxes 1,741 2,086 2,140 Income taxes Current 664 819 893 Deferred 38 14 (63) ------ --------- --------- Total income taxes 702 833 830 ----- -------- -------- NET EARNINGS $1,039 $ 1,253 $ 1,310 ===== ======= ======= EARNINGS PER SHARE Basic $1.03 $1.13 $1.20 ==== ==== ==== Diluted $1.03 $1.12 $1.18 ==== ==== ====
The accompanying notes are an integral part of these statements. River Valley Bancorp CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Year ended December 31, (In thousands)
1999 1998 1997 Net earnings $1,039 $1,253 $1,310 Other comprehensive income, net of tax: Unrealized holding gains (losses) on securities during the period, net of tax benefits of $22, $10 and $8 in 1999, 1998 and 1997, respectively (43) 19 15 Reclassification adjustment for realized losses included in earnings, net of tax benefit of $2 for the year ended December 31, 1997 - - 4 ----- ----- -------- Comprehensive income $ 996 $1,272 $1,329 ====== ===== ===== Accumulated comprehensive loss $ (56) $ (13) $ (32) ===== ====== ======
The accompanying notes are an integral part of these statements. River Valley Bancorp CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY Years ended December 31, 1999, 1998 and 1997 (In thousands, except share data)
Unrealized Shares gains (losses) acquired on securities Additional by stock designated Common paid-in benefit as available Retained Treasury stock capital plans for sale earnings stock Total Balance at January 1, 1997 $ - $11,173 $ (952) $ (51) $6,635 $ - $16,805 Purchase of shares for stock benefit plans - - (174) - - - (174) Amortization of expense related to stock benefit plans - 56 121 - 7 - 184 Cash dividends of $0.13 per common share - - - - (155) - (155) Net earnings for the year ended December 31, 1997 - - - - 1,310 - 1,310 Unrealized gains on securities designated as available for sale, net of related tax effects - - - - - - 19 --- ------- ------ ---- ----- ------- ------- Balance at December 31, 1997 - 11,229 (1,005) (32) 7,797 - 17,989 Purchase of treasury shares - - - - - (270) (270) Issuance of shares under stock option plan - - - - - 18 18 Purchase of shares for stock benefit plans - - (428) - - - (428) Amortization of expense related to stock benefit plans - 59 234 - - - 293 Cash dividends of $0.22 per common share - - - - (261) - (261) Net earnings for the year ended December 31, 1998 - - - - 1,253 - 1,253 Unrealized gains on securities designated as available for sale, net of related tax effects - - - 19 - - 19 -- ------- ------ ---- ----- ---------- ------- Balance at December 31, 1998 - 11,288 (1,199) (13) 8,789 (252) 18,613 Purchase of treasury shares - - - - - (2,724) (2,724) Amortization of expense related to stock benefit plans - 26 232 - - - 258 Cash dividends of $0.265 per common share - - - - (277) - (277) Net earnings for the year ended December 31, 1999 - - - - 1,039 - 1,039 Unrealized losses on securities designated as available for sale, net of related tax effects - - - (43) - - (43) --- ---- ------ --- ----- --------- ------- Balance at December 31, 1999 $ - $11,314 $ (967) $ (56) $9,551 $(2,976) $16,866 ==== ====== ======== === ===== ====== ======
The accompanying notes are an integral part of these statements. River Valley Bancorp CONSOLIDATED STATEMENTS OF CASH FLOWS Year ended December 31, (In thousands)
1999 1998 1997 Cash flows from operating activities: Net earnings for the year $ 1,039 $ 1,253 $ 1,310 Adjustments to reconcile net earnings to net cash provided by (used in) operating activities: Amortization (accretion) of premiums and discounts on investments, mortgage-backed and related securities - net (95) 39 1 Loss on sale of investment, mortgage-backed and related securities designated as available for sale - - 6 Depreciation and amortization 250 223 223 Gain on sale of office premises (11) (57) - Gain on sale of Hanover branch and related deposits - - (206) Loans originated for sale in the secondary market (10,552) (20,042) (6,538) Proceeds from sale of loans in the secondary market 14,226 17,194 6,996 (Gain) loss on sale of loans in the secondary market 27 (169) (66) Amortization of deferred loan origination costs 93 99 73 Provision for losses on loans 140 275 304 Amortization of goodwill 6 27 27 Amortization expense of stock benefit plans 258 293 184 Increase (decrease) in cash due to changes in: Accrued interest receivable on loans 17 (71) (97) Accrued interest receivable on mortgage-backed and related securities 14 77 (39) Accrued interest receivable on investments and interest-earning deposits (18) 36 106 Prepaid expenses and other assets 163 (232) 28 Accrued interest payable (138) 5 184 Other liabilities (121) (467) (47) Income taxes Current 46 (410) 9 Deferred 38 14 (63) --------- ---------- --------- Net cash provided by (used in) operating activities 5,382 (1,913) 2,395 Cash flows provided by (used in) investing activities: Purchase of investment securities designated as available for sale (21,537) - - Proceeds from maturity of investment securities 17,690 3,000 2,000 Proceeds from sales of investment securities designated as available for sale - - 2,698 Purchase of mortgage-backed and related securities designated as available for sale - - (1,350) Principal repayments on mortgage-backed and related securities 1,709 2,970 3,072 Proceeds from sale of mortgage-backed and related securities designated as available for sale - - 2,146 Loan principal repayments 39,640 51,624 43,220 Loan disbursements (46,313) (49,479) (47,079) Proceeds from sale of real estate acquired through foreclosure 75 - - Additions to real estate acquired through foreclosure - - (1) Proceeds from sale of office premises and equipment 49 67 405 Purchase of office premises and equipment (245) (191) (430) (Increase) decrease in certificates of deposit in other financial institutions - 897 (797) Purchase of Federal Reserve Bank stock - - (64) Proceeds from sale of Federal Reserve Bank stock - - 144 Increase in cash surrender value of life insurance (36) (42) (29) ---- ---- ---- Net cash provided by (used in) investing activities (8,968) 8,846 3,935 --------- ------- ------- Net cash provided by (used in) operating and investing activities (subtotal carried forward) (3,586) 6,933 6,330 --------- ------- -------
River Valley Bancorp CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) Year ended December 31, (In thousands)
1999 1998 1997 Net cash provided by (used in) operating and investing activities (subtotal brought forward) $ (3,586) $ 6,933 $ 6,330 Cash flows provided by (used in) financing activities: Increase (decrease) in deposit accounts (3,900) 3,196 (3,913) Decrease in deposit accounts due to the sale of a branch - - (6,788) Proceeds from Federal Home Loan Bank advances 6,000 6,000 7,000 Repayment of Federal Home Loan Bank advances - (8,000) (6,100) Proceeds from other borrowed money 3,131 270 - Repayment of other borrowed money (2,901) - - Advances by borrowers for taxes and insurance 2 (19) (17) Purchase of shares (2,724) (270) - Stock options exercised - 18 - Acquisition of common stock for stock benefit plans - (428) (174) Dividends on common stock (277) (261) (155) -------- -------- -------- Net cash provided by (used in) financing activities (669) 506 (10,147) -------- --------- ------ Net increase (decrease) in cash and cash equivalents (4,255) 7,439 (3,817) Cash and cash equivalents at beginning of year 12,307 4,868 8,685 ------ ------- ------- Cash and cash equivalents at end of year $ 8,052 $12,307 $ 4,868 ======= ====== ======= Supplemental disclosure of cash flow information: Cash paid during the year for: Federal income taxes $ 469 $ 1,014 $ 618 ====== ======= ======== Interest on deposits and borrowings $ 4,755 $ 4,837 $ 4,865 ===== ======= ======= Supplemental disclosure of noncash investing activities: Transfers from loans to real estate acquired through foreclosure $ - $ - $ 81 ====== ======= ========= Unrealized gains (losses) on securities designated as available for sale, net of related tax effects $ (43) $ 19 $ 19 ======= ========= ========= Recognition of mortgage servicing rights in accordance with SFAS No. 125 $ 101 $ 170 $ 61 ======= ======== ========= Exchange of office premises and equipment for similar assets $ 103 $ - $ - ======= ========== ======
The accompanying notes are an integral part of these statements. River Valley Bancorp NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 1998 and 1997 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES River Valley Bancorp (the "Corporation") is a savings and loan holding company whose activities are primarily limited to holding the stock of River Valley Financial Bank ("River Valley Financial" or the "Bank"). The Bank conducts a general banking business in southeastern Indiana which consists of attracting deposits from the general public and applying those funds to the origination of loans for residential, consumer and commercial purposes. River Valley Financial's profitability is significantly dependent on its net interest income, which is the difference between interest income generated from interest-earning assets (i.e. loans and investments) and the interest expense paid on interest-bearing liabilities (i.e. customer deposits and borrowed funds). Net interest income is affected by the relative amount of interest-earning assets and interest-bearing liabilities and the interest received or paid on these balances. The level of interest rates paid or received by the Bank can be significantly influenced by a number of competitive factors, such as governmental monetary policy, that are outside of management's control. The consolidated financial information presented herein has been prepared in accordance with generally accepted accounting principles ("GAAP") and general accounting practices within the financial services industry. In preparing financial statements in accordance with GAAP, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reporting period. Actual results could differ from such estimates. The following is a summary of significant accounting policies, which have been consistently applied in the preparation of the accompanying consolidated financial statements. 1. Principles of Consolidation The consolidated financial statements include the accounts of the Corporation and its subsidiary, the Bank and its subsidiary, Madison First Service Corporation ("First Service"). All significant intercompany balances and transactions have been eliminated in the accompanying consolidated financial statements. 2. Investment Securities and Mortgage-Backed and Related Securities The Corporation accounts for investment securities and mortgage-backed and related securities in accordance with Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities." SFAS No. 115 requires that investments be categorized as held-to-maturity, trading, or available for sale. Securities classified as held-to-maturity are carried at cost only if the Corporation has the positive intent and ability to hold these securities to maturity. Trading securities and securities available for sale are carried at fair value with resulting unrealized gains or losses recorded to operations or shareholders' equity, respectively. At December 31, 1999 and 1998, the Corporation's shareholders' equity included unrealized losses on securities designated as available for sale, net of related tax effects, of $56,000 and $13,000, respectively. Realized gains and losses on sales of investment and mortgage-backed and related securities are recognized using the specific identification method. River Valley Bancorp NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 1999, 1998 and 1997 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 3. Loans Receivable Loans held in portfolio are stated at the principal amount outstanding, adjusted for unamortized yield adjustments, including deferred loan origination costs and capitalized mortgage servicing rights, and the allowance for loan losses. The yield adjustments are amortized and accreted to operations using the interest method over the average life of the underlying loans. Interest is accrued as earned unless the collectibility of the loan is in doubt. Uncollectible interest on loans that are contractually past due is charged off, or an allowance is established based on management's periodic evaluation. The allowance is established by a charge to interest income equal to all interest previously accrued, and income is subsequently recognized only to the extent that cash payments are received until, in management's judgment, the borrower's ability to make periodic interest and principal payments has returned to normal, in which case the loan is returned to accrual status. Loans held for sale are carried at the lower of cost (less principal payments received) or fair value (market value), calculated on an aggregate basis. At December 31, 1999, the Corporation had not identified any loans as held for sale. At December 31, 1998, loans held for sale were carried at cost, which approximated fair value. At December 31, 1999 and 1998, the Bank was servicing approximately $40.2 million and $34.3 million, respectively, of mortgage loans that have been sold to the Federal Home Loan Mortgage Corporation. The Bank retains the servicing on loans sold and agrees to remit to the investor loan principal and interest at agreed-upon rates. The Bank accounts for mortgage servicing rights pursuant to the provisions of SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," which requires that the Bank recognize as separate assets, rights to service mortgage loans for others, regardless of how those servicing rights are acquired. An institution that acquires mortgage servicing rights through either the purchase or origination of mortgage loans and sells those loans with servicing rights retained must allocate some of the cost of the loans to the mortgage servicing rights. SFAS No. 125 requires that capitalized mortgage servicing rights and capitalized excess servicing receivables be assessed for impairment. Impairment is measured based on fair value. The mortgage servicing rights recorded by the Bank, calculated in accordance with the provisions of SFAS No. 125, were segregated into pools for valuation purposes, using as pooling criteria the loan term and coupon rate. Once pooled, each grouping of loans was evaluated on a discounted earnings basis to determine the present value of future earnings that a purchaser could expect to realize from each portfolio. Earnings were projected from a variety of sources including loan servicing fees, interest earned on float, net interest earned on escrows, miscellaneous income, and costs to service the loans. The present value of future earnings is the "economic" value for the pool, i.e., the net realizable present value to an acquirer of the acquired servicing. River Valley Bancorp NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 1999, 1998 and 1997 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 3. Loans Receivable (continued) The Bank recorded amortization related to mortgage servicing rights totaling approximately $99,000, $34,000 and $18,000 for the years ended December 31, 1999, 1998 and 1997, respectively. At December 31, 1999, the carrying value of the Corporation's mortgage servicing rights totaled approximately $225,000 and the fair value totaled approximately $286,000. At December 31, 1998, the carrying value and fair value of the Corporation's mortgage servicing rights totaled approximately $222,000. 4. Loan Origination Fees and Costs The Corporation accounts for loan origination fees and costs in accordance with SFAS No. 91, "Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases." Pursuant to the provisions of SFAS No. 91, all loan origination fees received, net of certain direct origination costs, are deferred on a loan-by-loan basis and amortized to interest income using the interest method, giving effect to actual loan prepayments. Additionally, SFAS No. 91 generally limits the definition of loan origination costs to the direct costs attributable to originating a loan, i.e., principally actual personnel costs. Fees received for loan commitments that are expected to be drawn upon, based on the Corporation's experience with similar commitments, are deferred and amortized over the life of the related loan using the interest method. Fees for other loan commitments are deferred and amortized over the loan commitment period on a straight-line basis. 5. Allowance for Losses on Loans It is the Corporation's policy to provide valuation allowances for estimated losses on loans based on past loss experience, trends in the level of delinquent and specific problem loans, loan concentrations to single borrowers, changes in the composition of the loan portfolio, adverse situations that may affect the borrower's ability to repay, the estimated value of any underlying collateral and current and anticipated economic conditions in its primary lending area. When the collection of a loan becomes doubtful, or otherwise troubled, the Corporation records a loan loss provision equal to the difference between the fair value of the property securing the loan and the loan's carrying value. Such provision is based upon management's estimate of the fair value of the underlying collateral, taking into consideration the current and currently anticipated future operating or sales conditions. As a result, such estimates are particularly susceptible to changes that could result in a material adjustment to results of operations in the near term. The Corporation accounts for impaired loans in accordance with SFAS No. 114, "Accounting by Creditors for Impairment of a Loan." SFAS No. 114 requires that impaired loans be measured based upon the present value of expected future cash flows discounted at the loan's effective interest rate or, as an alternative, at the loan's observable market price or fair value of the collateral. River Valley Bancorp NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 1999, 1998 and 1997 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 5. Allowance for Losses on Loans (continued) Under SFAS No. 114, a loan is defined as impaired when, based on current information and events, it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. In applying the provisions of SFAS No. 114, the Corporation considers its investment in one-to-four family residential loans and consumer installment loans to be homogeneous and therefore excluded from separate identification for evaluation of impairment. With respect to the Corporation's investment in nonresidential, commercial, and multifamily residential real estate loans, and its evaluation of impairment thereof, such loans are generally collateral dependent and, as a result, are carried as a practical expedient at the lower of cost or fair value. It is generally the Corporation's policy to charge off unsecured credits that are more than ninety days delinquent. Similarly, collateral dependent loans which are more than ninety days delinquent are considered to constitute more than a minimum delay in repayment and are evaluated for impairment under SFAS No. 114 at that time. At December 31, 1999 and 1998, the Corporation had approximately $600,000 and $1.3 million, respectively, of loans defined as impaired under SFAS No. 114. 6. Real Estate Acquired through Foreclosure Real estate acquired through foreclosure is carried at the lower of the loan's unpaid principal balance (cost) or fair value less estimated selling expenses at the date of acquisition. Real estate loss provisions are recorded if the property's fair value subsequently declines below the value determined at the recording date. In determining the lower of cost or fair value at acquisition, costs relating to development and improvement of property are considered. Costs relating to holding real estate acquired through foreclosure, net of rental income, are charged against earnings as incurred. 7. Office Premises and Equipment Depreciation of office premises and equipment is computed using the straight-line method over the estimated useful lives of the assets, estimated to be thirty to forty-five years for buildings, three to ten years for furniture and equipment, and three years for automobiles. 8. Amortization of Goodwill Amortization of goodwill, resulting from the acquisition of Citizens National Bank of Madison ("Citizens"), is provided using the straight-line method over an estimated life of ten years. During 1998, goodwill was reduced by approximately $168,000 for the favorable resolution of certain pre-acquisition contingencies, and for the purchase of minority interest shares at a price below the assigned value at acquisition. Management periodically evaluates the carrying value of goodwill in relation to the continuing earnings capacity of the acquired assets and assumed liabilities. River Valley Bancorp NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 1999, 1998 and 1997 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 9. Income Taxes The Corporation accounts for income taxes pursuant to SFAS No. 109, "Accounting for Income Taxes." Pursuant to the provisions of SFAS No. 109, a deferred tax liability or deferred tax asset is computed by applying the current statutory tax rates to net taxable or deductible temporary differences between the tax basis of an asset or liability and its reported amount in the consolidated financial statements that will result in net taxable or deductible amounts in future periods. Deferred tax assets are recorded only to the extent that the amount of net deductible temporary differences or carryforward attributes may be utilized against current period earnings, carried back against prior years' earnings, offset against taxable temporary differences reversing in future periods, or utilized to the extent of management's estimate of future taxable income. A valuation allowance is provided for deferred tax assets to the extent that the value of net deductible temporary differences and carryforward attributes exceeds management's estimates of taxes payable on future taxable income. Deferred tax liabilities are provided on the total amount of net temporary differences taxable in the future. The Corporation's principal temporary differences between pretax financial income and taxable income result primarily from different methods of accounting for deferred loan origination costs, the allowance for valuation decline on mortgage-related securities, mortgage servicing rights, purchase accounting adjustments, the general loan loss allowance, the percentage of earnings bad debt deduction and certain components of retirement and benefit plan expense. A temporary difference is also recognized for depreciation expense computed using accelerated methods for federal income tax purposes. 10. Retirement and Incentive Plans The Bank's employees are covered by a defined benefit non-contributory pension plan administered by the Pentegra Group, previously the Financial Institutions Retirement Fund (the "Fund"). Contributions are determined to cover the normal cost of pension benefits, the one-year cost of the pre-retirement death and disability benefits and the amortization of any unfunded accrued liabilities. The Fund had previously advised the Bank that the pension plan meets the criteria of a multi-employer pension plan as defined in SFAS No. 87, "Employers' Accounting for Pensions." In accordance with SFAS No. 87, net pension cost is recognized for any required contribution for the period. A liability is recognized for any contributions due and unpaid. Because of the continuing overfunded status of the Fund, no contributions were made to the pension plan during the years ended December 31, 1999, 1998, and 1997. The provision for pension expense was computed by the Fund's actuaries utilizing the projected unit credit cost method and assuming a 7.5% return on Fund assets. During 1997, the Corporation implemented a contributory 401(k) plan covering all employees who have attained the age of 21 and have completed one year of service. Contributions to the plan are voluntary and are subject to matching by the employer. The Bank's contributions to the plan totaled approximately $24,000, $28,000 and $48,000 for the years ended December 31, 1999, 1998, and 1997, respectively. River Valley Bancorp NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 1999, 1998 and 1997 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 10. Retirement and Incentive Plans (continued) The Bank has a supplemental retirement plan which provides retirement benefits to all directors. The Bank's obligations under the plan have been funded via the purchase of key man life insurance policies, of which the Bank is the beneficiary. Expense recognized under the supplemental retirement plan totaled approximately $32,000, $22,000 and $3,000 for the years ended December 31, 1999, 1998 and 1997, respectively. The Corporation has an Employee Stock Ownership Plan ("ESOP"), which provides retirement benefits for substantially all employees who have completed one year of service and have attained the age of 21. The Corporation accounts for the ESOP in accordance with Statement of Position (SOP) 93-6, "Employers' Accounting for Employee Stock Ownership Plans." SOP 93-6 requires the measure of compensation expense recorded by employers to equal the fair value of ESOP shares allocated to participants during the year. Expense related to the ESOP totaled approximately $147,000, $200,000 and $200,000 for the years ended December 31, 1999, 1998 and 1997, respectively. The Corporation also has a Recognition and Retention Plan ("RRP") which provides for the award and issuance of up to 47,610 shares of the Corporation's stock to members of the Board of Directors and management. During 1998 and 1997, the RRP purchased 32,316 shares of the Corporation's common stock in the open market. At December 31, 1999, 31,271 shares had been awarded. Common stock awarded under the RRP vests ratably over a five-year period, commencing with the date of the award. Expense recognized under the RRP plan totaled approximately $113,000, $113,000 and $61,000 for the years ended December 31, 1999, 1998, and 1997, respectively. 11. Earnings Per Share Basic earnings per share is computed based upon the weighted-average shares outstanding during the period, less shares in the ESOP that are unallocated and not committed to be released. Weighted-average common shares outstanding, which gives effect to 71,730, 83,124 and 95,220 unallocated ESOP shares, totaled 1,007,087, 1,105,930 and 1,095,030 for the years ended December 31, 1999, 1998, and 1997, respectively. Diluted earnings per share is computed taking into consideration common shares outstanding and dilutive potential common shares to be issued under the Corporation's stock option plan. Weighted-average common shares deemed outstanding for purposes of computing diluted earnings per share totaled 1,007,087, 1,121,986 and 1,106,858 for the years ended December 31, 1999, 1998, and 1997, respectively. There were 16,056 and 11,828 incremental shares related to the assumed exercise of stock options included in the computation of diluted earnings per share for the years ended December 31, 1998 and 1997, respectively. Options to purchase 93,959 shares of common stock with a weighted-average exercise price of $14.70 were outstanding at December 31, 1999, but were excluded from the computation of common share equivalents because their exercise prices were greater than the average market price of the common shares. River Valley Bancorp NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 1999, 1998 and 1997 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 12. Cash and Cash Equivalents For purposes of reporting cash flows, cash and cash equivalents includes cash and due from banks, federal funds sold, and interest-earning deposits in other financial institutions with original maturities of less than ninety days. 13. Fair Value of Financial Instruments SFAS No. 107, "Disclosures About Fair Value of Financial Instruments", requires disclosure of the fair value of financial instruments, both assets and liabilities whether or not recognized in the consolidated statement of financial condition, for which it is practicable to estimate that value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument. SFAS No. 107 excludes certain financial instruments and all non-financial instruments from the disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Corporation. The following methods and assumptions were used by the Corporation in estimating its fair value disclosures for financial instruments. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. Cash and cash equivalents: The carrying amounts presented in the consolidated statements of financial condition for cash and cash equivalents are deemed to approximate fair value. Investment and mortgage-backed and related securities: Fair values for investment and mortgage-backed and related securities are based on quoted market prices and dealer quotes. Loans receivable: The loan portfolio has been segregated into categories with similar characteristics, such as one-to-four family residential, multi-family residential and nonresidential real estate. These categories were further delineated into fixed-rate and adjustable-rate loans. The fair values for the resultant categories were computed via discounted cash flow analysis, using current interest rates offered for loans with similar terms to borrowers of similar credit quality. For loans on deposit accounts, and consumer and other loans, fair values were deemed to equal the historic carrying values. River Valley Bancorp NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 1999, 1998 and 1997 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 13. Fair Value of Financial Instruments (continued) Federal Home Loan Bank stock: The carrying amount presented in the consolidated statements of financial condition is deemed to approximate fair value. Deposits: The fair values of deposits with no stated maturity, such as NOW and super NOW accounts, passbook accounts and money market demand accounts are deemed to approximate the amount payable on demand as of December 31, 1999 and 1998. The fair values for fixed-rate certificates of deposit are based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for deposits of similar remaining maturities. Advances from the Federal Home Loan Bank: The fair value of these advances is estimated using the rates currently offered for similar advances of similar remaining maturities or, when available, quoted market prices. Other borrowed money: The carrying value for these variable rate borrowings is deemed to approximate fair value. Advances by borrowers for taxes and insurance: The carrying amount of advances by borrowers for taxes and insurance is deemed to approximate fair value. Commitments to extend credit: For fixed-rate and adjustable-rate loan commitments, the fair value estimate considers the difference between current levels of interest rates and committed rates. The difference between the fair value and notional amount of outstanding loan commitments at December 31, 1999 and 1998, was not material. Based on the foregoing methods and assumptions, the carrying value and fair value of the Corporation's financial instruments are as follows at December 31:
1999 1998 Carrying Fair Carrying Fair value value value value (In thousands) Financial assets Cash and cash equivalents $ 8,052 $ 8,052 $ 12,307 $ 12,307 Investment securities designated as available for sale 4,230 4,230 283 283 Investment securities held to maturity 1,000 995 1,000 980 Mortgage-backed and related securities designated as available for sale 2,071 2,071 2,796 2,796 Mortgage-backed and related securities held to maturity 2,138 2,147 3,190 3,220 Loans receivable - net 115,131 112,633 112,385 120,163 Federal Home Loan Bank stock 943 943 943 943 -------- -------- -------- -------- $133,565 $131,071 $132,904 $140,692 ======= ======= ======= ======= Financial liabilities Deposits $114,251 $114,527 $118,151 $118,496 Advances from the Federal Home Loan Bank 6,000 6,000 - - Other borrowed money 500 500 270 270 Advances by borrowers for taxes and insurance 36 36 34 34 -------- -------- -------- -------- $120,787 $121,063 $118,455 $118,800 ======= ======= ======= =======
River Valley Bancorp NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 1999, 1998 and 1997 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 14. Advertising Advertising costs are expensed when incurred. 15. Reclassifications Certain prior year amounts have been reclassified to conform to the 1999 consolidated financial statement presentation. NOTE B - INVESTMENTS AND MORTGAGE-BACKED SECURITIES Amortized cost and estimated fair values of investment securities at December 31 are summarized as follows:
1999 1998 Estimated Estimated Amortized fair Amortized fair cost value cost value (In thousands) Held to maturity: U.S. Government agency obligations $1,000 $ 995 $1,000 $ 980 Available for sale: Commercial paper 2,972 2,957 - - Corporate bonds 1,000 1,000 - - Municipal obligations 276 273 276 283 ------ ------ ------ ------ Total securities available for sale 4,248 4,230 276 283 ----- ----- ------ ------ Total investment securities $5,248 $5,225 $1,276 $1,263 ===== ===== ===== =====
At December 31, 1999 and 1998, the cost carrying value of the Corporation's investment securities held to maturity exceeded fair value by $5,000 and $20,000, respectively, comprised solely of gross unrealized losses. River Valley Bancorp NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 1999, 1998 and 1997 NOTE B - INVESTMENTS AND MORTGAGE-BACKED SECURITIES (continued) The amortized cost and estimated fair value of U. S. Government agency obligations designated as held to maturity at December 31 by term to maturity are shown below. Maturity dates do not reflect effects of call provisions inherent in the bonds' contractual terms.
1999 1998 Estimated Estimated Amortized fair Amortized fair cost value cost value (In thousands) Due in one year or less $1,000 $995 $ - $ - Due in one to three years - - 1,000 980 ----- ----- ----- ---- $1,000 $995 $1,000 $980 ===== === ===== ===
The amortized cost and estimated fair value of commercial paper, corporate bonds and municipal obligations designated as available for sale at December 31, 1999 and 1998, by term to maturity are shown below.
1999 1998 Estimated Estimated Amortized fair Amortized fair cost value cost value (In thousands) Due in three to five years $4,072 $4,056 $100 $102 Due in five to ten years 176 174 176 181 ----- ----- --- --- $4,248 $4,230 $276 $283 ===== ===== === ===
The amortized cost, gross unrealized gains, gross unrealized losses and estimated fair values of mortgage-backed and related securities designated as held to maturity at December 31, 1999 and 1998 are shown below.
1999 Gross Gross Estimated Amortized unrealized unrealized fair cost gains losses value (In thousands) Federal Home Loan Mortgage Corporation participation certificates $ 856 $- $5 $ 851 Government National Mortgage Association participation certificates 900 14 - 914 Federal National Mortgage Association participation certificates 367 - 1 366 Interest-only certificates 15 1 - 16 ------- --- -- ------- $2,138 $15 $6 $2,147 ===== == = =====
River Valley Bancorp NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 1999, 1998 and 1997 NOTE B - INVESTMENTS AND MORTGAGE-BACKED SECURITIES (continued)
1998 Gross Gross Estimated Amortized unrealized unrealized fair cost gains losses value (In thousands) Federal Home Loan Mortgage Corporation participation certificates $1,343 $- $2 $1,341 Government National Mortgage Association participation certificates 1,190 22 - 1,212 Federal National Mortgage Association participation certificates 639 10 - 649 Interest-only certificates 18 - - 18 ------- -- -- ------- $3,190 $ 32 $2 $3,220 ===== ==== = =====
The amortized cost of mortgage-backed and related securities held to maturity at December 31, 1999, by contractual terms to maturity are shown below. Expected maturities will differ from contractual maturities because borrowers may generally prepay obligations without prepayment penalties. Amortized cost (In thousands) Due within one year $ 857 Due after one to three years 2 Due after three to five years 1 Due after ten to twenty years 746 Due after twenty years 532 ------- $2,138 ====== The amortized cost, gross unrealized gains, gross unrealized losses and estimated fair values of mortgage-backed and related securities designated as available for sale at December 31, 1999 and 1998 are shown below.
1999 Gross Gross Estimated Amortized unrealized unrealized fair cost gains losses value (In thousands) Federal Home Loan Mortgage Corporation participation certificates $ 330 $ - $ 5 $ 325 Government National Mortgage Association participation certificates 186 - 4 182 Federal National Mortgage Association participation certificates 995 - 36 959 Collateralized mortgage obligations 627 - 22 605 ------ --- --- ------ $2,138 $ - $67 $2,071 ===== ===== == =====
River Valley Bancorp NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 1999, 1998 and 1997 NOTE B - INVESTMENTS AND MORTGAGE-BACKED SECURITIES (continued)
1998 Gross Gross Estimated Amortized unrealized unrealized fair cost gains losses value (In thousands) Federal Home Loan Mortgage Corporation participation certificates $ 644 $ 7 $ - $ 651 Government National Mortgage Association participation certificates 277 1 1 277 Federal National Mortgage Association participation certificates 1,275 3 29 1,249 Collateralized mortgage obligations 627 - 8 619 ------ -- ---- ------ $2,823 $ 11 $ 38 $2,796 ===== ==== === =====
The amortized cost of mortgage-backed and related securities designated as available for sale at December 31, 1999, by contractual terms to maturity are shown below. Expected maturities will differ from contractual maturities because borrowers may generally prepay obligations without prepayment penalties. Amortized cost (In thousands) Due in one year or less $ 8 Due after one to three years 235 Due after five to ten years 286 Due after ten to twenty years 343 Due after twenty years 1,266 ----- $2,138 ====== NOTE C - LOANS RECEIVABLE The composition of the loan portfolio at December 31 is as follows: 1999 1998 (In thousands) Residential real estate One-to-four family residential $ 69,588 $ 62,206 Multi-family residential 2,918 1,775 Construction 4,163 8,126 Nonresidential real estate and land 22,837 13,904 Commercial 9,780 12,461 Consumer and other 9,544 12,640 Deferred loan origination costs 245 200 --------- ---------- 119,075 111,312 Less: Undisbursed portion of loans in process 2,422 1,151 Allowance for loan losses 1,522 1,477 -------- --------- $115,131 $108,684 ======== ======== River Valley Bancorp NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 1999, 1998 and 1997 NOTE C - LOANS RECEIVABLE (continued) As depicted above, the Bank's lending efforts have historically focused on one-to-four family residential real estate loans, multi-family residential real estate loans and construction real estate loans, which comprise approximately $74.3 million, or 64%, of the total loan portfolio at December 31, 1999 and approximately $71.0 million, or 65%, of the total loan portfolio at December 31, 1998. Generally, such loans have been underwritten on the basis of no more than an 80% loan-to-value ratio, which has historically provided the Bank with adequate collateral coverage in the event of default. Nevertheless, the Bank, as with any lending institution, is subject to the risk that residential real estate values could deteriorate in its primary lending areas of southeastern Indiana and northwestern Kentucky, thereby impairing collateral values. However, management is of the belief that residential real estate values in the Bank's primary lending areas are presently stable. In the ordinary course of business, the Bank has granted loans to some of its officers, directors and their related business interests. In the opinion of management, such loans are consistent with sound lending practices and are in accordance with applicable regulatory lending limitations. The aggregate dollar amount of loans outstanding to related parties was approximately $893,000 and $781,000 at December 31, 1999 and 1998, respectively. NOTE D - ALLOWANCE FOR LOAN LOSSES The activity in the allowance for loan losses is summarized as follows for the years ended December 31: 1999 1998 1997 (In thousands) Balance at beginning of year $1,477 $1,276 $1,190 Provision for losses on loans 140 275 304 Charge-offs of loans (123) (223) (269) Recoveries of loan losses 28 149 51 ------- ------ ------- Balance at end of year $1,522 $1,477 $1,276 ===== ===== ===== As of December 31, 1999, the Corporation's allowance for loan losses was comprised of a general loan loss allowance of approximately $1.4 million, which is includible as a component of regulatory risk-based capital, and a specific loan loss allowance of $113,000. The Corporation had nonperforming loans totaling $857,000, $1.9 million and $718,000 at December 31, 1999, 1998 and 1997, respectively. The Corporation would have recognized approximately $6,000 and $9,000 of additional interest income related to such nonperforming loans had these loans performed pursuant to contractual terms during the years ended December 31, 1999 and 1998, respectively. The Corporation had no material loss of interest income related to nonperforming loans during the year ended December 31, 1997. River Valley Bancorp NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 1999, 1998 and 1997 NOTE E - OFFICE PREMISES AND EQUIPMENT Office premises and equipment at December 31 are comprised of the following: 1999 1998 (In thousands) Land and improvements $ 792 $ 675 Office buildings and improvements 1,724 1,758 Leasehold improvements 117 117 Furniture, fixtures and equipment 2,183 2,113 Automobiles 18 18 ------- ------- 4,834 4,681 Less accumulated depreciation 2,854 2,658 ----- ----- $1,980 $2,023 ===== ===== River Valley Bancorp NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 1999, 1998 and 1997 NOTE F - DEPOSITS Deposits consist of the following major classifications at December 31:
Deposit type and 1999 1998 weighted-average interest rate Amount % Amount % (Dollars in thousands) Non-interest bearing accounts $ 7,903 6.9% $ 8,365 7.0% NOW accounts 1999 - 2.62% 14,329 12.6 1998 - 2.60% 14,417 12.2 Money market demand accounts 1999 - 4.10% 6,886 6.0 1998 - 2.92% 6,984 5.9 Savings accounts 1999 - 3.52% 26,640 23.3 1998 - 3.70% 22,378 19.0 ------------- -------- -------- ------ Total demand, transaction and savings deposits 55,758 48.8 52,144 44.1 Certificates of deposit 3.01% to 5.00% 4.39% in 1999 36,591 32.0 4.78% in 1998 23,200 19.6 5.01% to 6.00% 5.45% in 1999 14,250 12.5 5.34% in 1998 31,364 26.6 6.01% to 7.00% 6.14% in 1999 7,445 6.5 6.18% in 1998 11,229 9.5 7.01% to 8.00% 7.85% in 1999 207 .2 7.86% in 1998 214 .2 ------------ -------- --------- ------ Total certificates of deposit 58,493 51.2 66,007 55.9 -------- ----- -------- ------ Total deposit accounts $114,251 100.0% $118,151 100.0% ======= ===== ======= ======
The aggregate amount of certificates of deposit with a minimum denomination of $100,000 totaled approximately $11.2 million and $15.1 million at December 31, 1999 and 1998, respectively. River Valley Bancorp NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 1999, 1998 and 1997 NOTE F - DEPOSITS (continued) Interest expense on deposits for the years ended December 31 is summarized as follows: 1999 1998 1997 (In thousands) Savings $1,028 $ 768 $ 708 NOW accounts 351 344 435 Money market deposit accounts 195 211 480 Certificates of deposit 2,900 3,359 3,291 ----- ----- ----- $4,474 $4,682 $4,914 ===== ===== ===== Maturities of outstanding certificates of deposit are summarized as follows at December 31: 1999 1998 (In thousands) Less than one year $45,784 $53,931 One year to three years 10,934 10,880 More than three years 1,775 1,196 ------- ------- $58,493 $66,007 ====== ====== As a result of the Corporation's acquisition of Citizen's, regulatory authorities required the sale of one of the Bank's retail branches. A definitive agreement was reached in 1996, which provided for the purchaser to acquire the branch facility for a price approximating book value, while assuming the branch deposits, which totaled $6.8 million, for a premium on core deposits. The transaction was consummated in 1997 and resulted in an approximate after-tax gain of $125,000. NOTE G - ADVANCES FROM THE FEDERAL HOME LOAN BANK Federal Home Loan Bank advances, collateralized at December 31, 1999, by certain residential mortgage loans totaling $9.6 million and the Bank's investment in Federal Home Loan Bank stock, consist of a $6.0 million advance, bearing interest at a rate of 5.91%, which matures during the year ended December 31, 2000. NOTE H - OTHER BORROWED MONEY Other borrowed money consists of a variable-rate two-year line of credit advance, bearing interest at December 31, 1999 of 8.00%, scheduled to mature in November 2000. The advance was collateralized by a pledge of the Corporation's stock of River Valley Financial. River Valley Bancorp NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 1999, 1998 and 1997 NOTE I - INCOME TAXES The provision for income taxes on earnings differs from that computed at the expected statutory corporate tax rate for the years ended December 31 as follows: 1999 1998 1997 (Dollars in thousands) Federal income taxes computed at expected statutory rate $592 $709 $728 State taxes, net of federal benefits 105 122 125 Increase (decrease) in taxes resulting from: Amortization of goodwill 2 9 9 Other 3 (7) (32) ---- ----- ---- Income tax provision per consolidated financial statements $702 $833 $830 === === === Effective tax rate 40.3% 39.9% 38.8% ==== ==== ==== The composition of the Corporation's net deferred tax asset at December 31 is as follows: Taxes (payable) refundable on temporary 1999 1998 differences at statutory rate: (In thousands) Deferred tax liabilities: Deferred loan origination costs $ (83) $ (68) Difference between book and tax depreciation (93) (93) Percentage of earnings bad debt deduction (178) (210) Mortgage servicing rights (86) (85) ------- ------- Total deferred tax liabilities (440) (456) Deferred tax assets: Deferred compensation 106 97 Allowance for valuation decline on mortgage-related securities 90 90 General loan loss allowance 647 628 Benefit plan expense 66 65 Unrealized loss on securities designated as available for sale 29 7 Purchase accounting adjustments related to asset valuation adjustments 142 227 ------- ------ Total deferred tax assets 1,080 1,114 ------ ----- Net deferred tax asset $ 640 $ 658 ====== ====== River Valley Bancorp NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 1999, 1998 and 1997 NOTE I - INCOME TAXES (continued) The Bank was allowed a special bad debt deduction based on a percentage of earnings generally limited to 8% of otherwise taxable income, or the amount of qualifying and nonqualifying loans outstanding, and subject to certain limitations based on aggregate loans and savings account balances at the end of the year. Retained earnings at December 31, 1999, includes approximately $2.4 million for which federal income taxes have not been provided. If the amounts that qualify as deductions for federal income tax purposes are later used for purposes other than for bad debt losses, including distributions in liquidation, such distributions will be subject to federal income taxes at the then current corporate income tax rate. The approximate amount of unrecognized deferred tax liability relating to the cumulative bad debt deduction was approximately $705,000 at December 31, 1999. The Bank is required to recapture as taxable income approximately $600,000 of its bad debt reserve, which represents the post-1987 additions to the reserve, and is unable to utilize the percentage of earnings method to compute the reserve in the future. The Bank has provided deferred taxes for this amount and commencing in 1998, began amortizing the recapture of the bad debt reserve into taxable income over a six year period. NOTE J - LOAN COMMITMENTS The Bank is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers, including commitments to extend credit. Such commitments involve, to varying degrees, elements of credit and interest-rate risk in excess of the amount recognized in the consolidated statements of financial condition. The Bank's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit is represented by the contractual notional amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as those utilized for on-balance-sheet instruments. At December 31, 1999, the Bank had outstanding commitments of approximately $366,000 to originate residential one-to-four family variable-rate real estate loans at interest rates ranging from 6.5% to 8.0%. The Bank had outstanding commitments of approximately $244,000 to originate residential one-to-four family fixed-rate real estate loans at interest rates ranging from 7.75% to 8.25% at December 31, 1999. Additionally, the Bank had commitments to originate loans secured by other real estate totaling $1.6 million as of December 31, 1999. The Bank also had unused lines of credit under home equity loans and commercial loans of approximately $2.7 million and $4.4 million, respectively, at December 31, 1999, and standby letters of credit totaling $97,000 at that date. In the opinion of management, all loan commitments equaled or exceeded prevalent market interest rates as of December 31, 1999, and such commitments have been underwritten on the same basis as that of the existing loan portfolio. Management believes that all loan commitments are able to be funded through cash flows from operations and existing excess liquidity. Fees received in connection with these commitments have not been recognized in earnings. River Valley Bancorp NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 1999, 1998 and 1997 NOTE J - LOAN COMMITMENTS (continued) Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if it is deemed necessary by the Bank, upon extension of credit, is based on management's credit evaluation of the counterparty. Collateral on loans may vary but the preponderance of loans granted generally include a mortgage interest in real estate as security. NOTE K - LEASES The Corporation leases a banking facility in the Wal-Mart Supercenter in Madison, which required the Corporation to make payments totaling approximately $23,000 in 1999. The original lease expired in September 1999 and the Corporation exercised the first of two five year renewal options. The lease agreement for this option period requires the Corporation to make payments of approximately $27,000 per year. NOTE L - STOCK OPTION PLAN In June 1997, the Corporation adopted the 1997 Stock Option Plan that provided for the issuance of 119,025 shares of common stock. Options to purchase 117,648 shares were granted during 1997 at an exercise price equal to the fair value at the date of grant. The Corporation accounts for its stock option plan in accordance with SFAS No. 123, "Accounting for Stock-Based Compensation," which contains a fair value-based method for valuing stock-based compensation that entities may use, which measures compensation cost at the grant date based on the fair value of the award. Compensation is then recognized over the service period, which is usually the vesting period. Alternatively, SFAS No. 123 permits entities to continue to account for stock options and similar equity instruments under Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees." Entities that continue to account for stock options using APB Opinion No. 25 are required to make pro forma disclosures of net earnings and earnings per share, as if the fair value-based method of accounting defined in SFAS No. 123 had been applied. River Valley Bancorp NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 1999, 1998 and 1997 NOTE L - STOCK OPTION PLAN (continued) The Corporation applies APB Opinion No. 25 and related Interpretations in accounting for its stock option plan. Accordingly, no compensation cost has been recognized for the plan. Had compensation cost for the Corporation's stock option plan been determined based on the fair value at the grant dates for awards under the plan consistent with the accounting method utilized in SFAS No. 123, the Corporation's net earnings and earnings per share would have been reduced to the pro forma amounts indicated below:
1999 1998 1997 Net earnings (in thousands) As reported $1,039 $1,253 $1,310 ===== ===== ===== Pro-forma $1,038 $1,253 $1,269 ===== ===== ===== Earnings per share Basic As reported $1.03 $1.13 $1.20 ==== ==== ==== Pro-forma $1.02 $1.13 $1.16 ==== ==== ==== Diluted As reported $1.03 $1.12 $1.18 ==== ==== ==== Pro-forma $1.02 $1.12 $1.15 ===== ==== ====
The fair value of each option grant is estimated on the date of grant using the modified Black-Scholes options-pricing model with the following weighted-average assumptions used for grants in 1999: dividend yield of 2.18%, expected volatility of 10.0%, a risk-free interest rate of 5.5% and expected lives of ten years. Similar assumptions were used for the grants in 1997, with the exception of a 1.013% dividend yield. A summary of the status of the Corporation's stock option plan as of December 31, 1999, 1998 and 1997, and changes during the periods then ended is presented below:
1999 1998 1997 Weighted- Weighted- Weighted- average average average exercise exercise exercise Shares price Shares price Shares price Outstanding at beginning of year 103,959 $14.81 105,149 $14.81 - $ - Granted 10,000 13.75 - - 117,648 14.81 Exercised - - (1,190) 14.78 - - Forfeited (20,000) 14.78 - - (12,499) 14.81 ------- ----- --------- ------- -------- ----- Outstanding at end of year 93,959 $14.70 103,959 $14.81 105,149 $14.81 ======= ===== ======= ===== ======= ===== Options exercisable at year-end 39,787 19,834 - ====== ======== ======= Weighted-average fair value of options granted during the year $ 2.79 N/A $ 4.85 ====== === =====
River Valley Bancorp NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 1999, 1998 and 1997 NOTE L - STOCK OPTION PLAN (continued) The following information applies to options outstanding at December 31, 1999: Number outstanding 93,959 Range of exercise prices $13.75-$17.875 Weighted-average exercise price $14.70 Weighted-average remaining contractual life 7.7 years NOTE M - CONDENSED FINANCIAL STATEMENTS OF RIVER VALLEY BANCORP The following condensed financial statements summarize the financial position of River Valley Bancorp at December 31, 1999 and 1998, and the results of its operations and its cash flows for the years ended December 31, 1999, 1998 and 1997. River Valley Bancorp STATEMENTS OF FINANCIAL CONDITION December 31, (In thousands)
ASSETS 1999 1998 Cash and interest-earning deposits $ 371 $ 198 Investment in River Valley Financial Bank 16,861 18,788 Prepaid expenses and other assets 134 84 -------- --------- Total assets $17,366 $19,070 ====== ====== LIABILITIES AND SHAREHOLDERS' EQUITY Other borrowed money $ 500 $ 270 Other liabilities - 187 --------- -------- Total liabilities 500 457 Shareholders' equity Preferred stock - - Common stock - - Additional paid in capital 11,314 11,288 Retained earnings 9,551 8,789 Shares acquired by stock benefit plans (967) (1,199) Treasury shares (2,976) (252) Accumulated comprehensive loss, unrealized losses on securities designated as available for sale, net of related tax effects (56) (13) -------- --------- Total shareholders' equity 16,866 18,613 ------ ------ Total liabilities and shareholders' equity $17,366 $19,070 ====== ======
River Valley Bancorp NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 1999, 1998 and 1997 NOTE M - CONDENSED FINANCIAL STATEMENTS OF RIVER VALLEY BANCORP (continued) River Valley Bancorp STATEMENTS OF EARNINGS Years ended December 31, (In thousands)
1999 1998 1997 Revenue Interest income $ 62 $ 71 $ 81 Equity in earnings of subsidiaries 1,125 1,274 1,390 ----- ----- ----- 1,187 1,345 1,471 Expense Interest expense 101 3 - General, administrative and other expense 105 102 243 ---- ------ ----- 206 105 243 ---- ---- ----- Earnings before income tax credits 981 1,240 1,228 Income tax credits 58 13 82 ------ ------- ------ NET EARNINGS $1,039 $1,253 $1,310 ===== ===== =====
River Valley Bancorp STATEMENTS OF CASH FLOWS Years ended December 31, (In thousands)
1999 1998 1997 Cash flows from operating activities: Net earnings for the year $ 1,039 $1,253 $1,310 Excess distributions from (undistributed earnings of) subsidiary 2,033 (1,274) (1,390) Amortization expense of stock benefit plans 109 114 128 Decrease in cash due to changes in: Prepaid expenses and other assets (50) (19) (65) Other liabilities (187) (7) (109) ------- -------- ----- Net cash provided by (used in) operating activities 2,944 67 (126) Cash flows from financing activities: Purchase of shares (2,724) (270) - Stock options exercised - 18 - Proceeds from other borrowed money 3,131 270 - Repayments of other borrowed money (2,901) - - Dividends paid on common stock (277) (261) (155) ------- ------ ------ Net cash used in financing activities (2,771) (243) (155) ------ ------ ------ Net increase (decrease) in cash and cash equivalents 173 (176) (281) Cash and cash equivalents at beginning of year 198 374 655 ------ ------ ------ Cash and cash equivalents at end of year $ 371 $ 198 $ 374 ======= ====== ======
River Valley Bancorp NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 1999, 1998 and 1997 NOTE N - REGULATORY CAPITAL The Bank is subject to minimum regulatory capital standards promulgated by the Office of Thrift Supervision (the "OTS"). Failure to meet minimum capital requirements can initiate certain mandatory -- and possibly additional discretionary -- actions by regulators that, if undertaken, could have a direct material effect on the Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, financial institutions must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. The OTS's minimum capital standards generally require the maintenance of regulatory capital sufficient to meet each of three tests, hereinafter described as the tangible capital requirement, the core capital requirement and the risk-based capital requirement. The tangible capital requirement provides for minimum tangible capital (defined as shareholders' equity less all intangible assets) equal to 1.5% of adjusted total assets. The core capital requirement provides for minimum core capital (tangible capital plus certain forms of supervisory goodwill and other qualifying intangible assets) generally equal to 4.0% of adjusted total assets except for those associations with the highest examination rating and acceptable levels of risk. The risk-based capital requirement currently provides for the maintenance of core capital plus general loss allowances equal to 8.0% of risk-weighted assets. In computing risk-weighted assets, the Bank multiplies the value of each asset on its statement of financial condition by a defined risk-weighting factor, e.g., one-to-four family residential loans carry a risk-weighted factor of 50%. During the calendar year, the Bank was notified from its regulator that it was categorized as "well-capitalized" under the regulatory framework for prompt corrective action. To be categorized as "well-capitalized" the Bank must maintain minimum capital ratios as set forth in the following table. At December 31, 1999 and 1998, management believes that the Bank met all capital adequacy requirements to which it was subject.
1999: To be "well- capitalized" under For capital prompt corrective Actual adequacy purposes action provisions Amount Ratio Amount Ratio Amount Ratio (Dollars in thousands) Tangible capital $16,850 12.1% =>$2,086 =>1.5% =>$6,954 => 5.0% Core capital $16,850 12.1% =>$5,563 =>4.0% =>$8,345 => 6.0% Risk-based capital $18,040 19.0% =>$7,615 =>8.0% =>$9,518 => 10.0%
River Valley Bancorp NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 1999, 1998 and 1997 NOTE N - REGULATORY CAPITAL (continued)
1998: To be "well- capitalized" under For capital prompt corrective Actual adequacy purposes action provisions Amount Ratio Amount Ratio Amount Ratio (Dollars in thousands) Tangible capital $18,729 13.5% =>$2,079 =>1.5% =>$6,931 => 5.0% Core capital $18,729 13.5% =>$5,545 =>4.0% =>$8,318 => 6.0% Risk-based capital $19,947 20.5% =>$7,793 =>8.0% =>$9,741 => 10.0%
The Bank's management believes that, under the current regulatory capital regulations, the Bank will continue to meet its minimum capital requirements in the foreseeable future. However, events beyond the control of the Bank, such as increased interest rates or a downturn in the economy in the primary market areas, could adversely affect future earnings and, consequently, the ability to meet future minimum regulatory capital requirements. The Bank is subject to regulations imposed by the OTS regarding the amount of capital distributions payable to the Corporation. Generally, the Bank's payment of dividends is limited, without prior OTS approval, to net earnings for the current calendar year plus the two preceding calendar years, less capital distributions paid over the comparable time period. Insured institutions are required to file an application with the OTS for capital distributions in excess of this limitation. GENERAL INFORMATION FOR SHAREHOLDERS Transfer Agent and Registrar: Corporate Trust Services Fifth Third Center 38 Fountain Square Plaza Cincinnati, Ohio 45263 Tel: (513) 579-5417 Fax: (513) 744-6785 Corporate Counsel: Lonnie D. Collins, Attorney 426 E. Main Street Madison, Indiana 47250 Tel: (812) 265-3616 Fax: (812) 273-3143 Shareholder and General Inquiries: River Valley Bancorp Attn: Matthew P. Forrester, President 430 Clifty Drive, P.O. Box 1590 Madison, Indiana 47250 Tel: (812) 273-4949 Fax: (812) 273-2883 Special Counsel: Barnes & Thornburg 11 S. Meridian Street Indianapolis, Indiana 46204 Tel: (317) 236-1313 Fax: (317) 231-7433 Annual and Other Reports: Additional copies of this Annual Report to Shareholders and copies of the most recent Form 10-K may be obtained without charge by contacting the Corporation. Offices of River Valley Financial Bank: Hilltop: 303 Clifty Drive 430 Clifty Drive Downtown: 233 East Main Street Drive thru: 401 East Main Street Wal-Mart: 567 Ivy Tech Drive Hanover: 10 Medical Plaza E-MAIL Address: rivervalleyfinancial.com Annual Meeting: The Annual Meeting of Shareholders of River Valley Bancorp will be held on Wednesday, April 19, 2000, at 3:00 PM, at 430 Clifty Drive, Madison, IN 47250. Memoriam Director Cecil L. Dorten passed away on February 17, 2000. Cecil Dorten was a valuable member of this organization, a major general (retired) in the Indiana National Guard, and an outstanding civic citizen. His counsel and business savvy will be greatly missed. BOARD OF DIRECTORS Fred W. Koehler Chairman Cecil L. Dorten Vice Chairman Earl W. Johann Director Michael J. Hensley Director Jonnie L. Davis Director Matthew P. Forrester Director & President Robert W. Anger Director ******************** Lonnie D. Collins Secretary EXECUTIVE OFFICERS OF RIVER VALLEY FINANCIAL BANK Matthew P. Forrester Director & President Mark A. Goley Vice President of Lending Robyne J. Hart Vice President of Operations Larry C. Fouse Vice President of Finance Deanna J. Liter Vice President of Data Services Loy M. Skirvin Director of Human Resources OFFICERS OF RIVER VALLEY FINANCIAL BANK Barbara J. Eades Assistant Vice President Branch Manager Robert J. Schoenstein, Jr. Assistant Vice President Loan Officer Angela D. Adams Branch Manager James B. Allen Branch Manager Kenneth L. Cull Loan Officer Theresa A. Dryden Loan Officer V. Kay Kimmel Loan Officer Linda L. Ralston Branch Manager Rhonda E. Wingham Branch Manager ADVISORY BOARD MEMBERS Burton P. Chambers Advisory Director Van E. Shelton Advisory Director Ralph E. Storm Advisory Director EX-21 4 SUBSIDIARIES OF RIVER VALLEY BANCORP Exhibit 21 SUBSIDIARIES OF RIVER VALLEY BANCORP Subsidiaries of River Valley Bancorp: Name Jurisdiction of Incorporation River Valley Financial Bank Federal Madison First Service Corporation Indiana EX-27 5 FDS FOR RIVER VALLEY BANCORP
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INOORMATION EXTRACTED FROM THE REGISTRANT'S UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED DECEMBER 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0001015593 River Valley Bancorp 1,000 U.S. Dollars YEAR DEC-31-1999 JAN-1-1999 DEC-31-1999 1.000 3,648 2,854 1,550 0 6,301 3,138 3,142 115,131 1,522 138,695 114,251 6,500 1,078 0 0 0 0 16,866 138,695 8,740 577 417 9,734 4,474 4,617 5,117 140 0 4,080 1,741 1,039 0 0 1,039 1.03 1.03 3.94 72 785 835 0 1,477 123 28 1,522 113 0 1,409
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